CHICAGO--Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (LT FC/LC IDRs) of Braskem S.A. (Braskem) at 'BBB-' and its National Scale rating at 'AAA(bra)'. The Rating Outlook on the FC IDR was revised to Stable from Negative, while the Outlook for Braskem's LC IDR and National Scale rating remains Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Braskem's ratings reflect its leading position in the Latin American petrochemical sector. The company's new polyethylene plant (BraskemIdesa - BI) in Mexico will improve its geographical and raw materials diversification. This plant is reliant upon ethane, unlike the company's plants in Brazil which primarily depend upon naphtha as a feedstock. As a result of the competitive costs of ethane relative to naphtha, the company's cost position, which is high for the industry, will improve.
In the near term, Braskem is expected to continue to benefit from the current relatively low feedstock prices, particularly for naphtha, and depreciation of Brazilian real compared to 2010 through 2014. Further factored into the company's ratings are its track record of a strong liquidity position and manageable debt amortization schedule.
The revision in the Outlook for Braskem's FC IDR reflects expectations of improved cash flow generated outside of Brazil due to the start of BI. This plant, in addition to those owned by the company in the U.S. and Europe, have allowed the company to be rated above the 'BB+' Country Ceiling for Brazil. Other considerations include cash generated abroad by exports, cash held abroad (BRL4 billion) and undrawn standby credit lines (USD750 million).
Decreasing Reliance upon Naphtha due to BI
Braskem's strategy to diversify its feedstock matrix in order to lower production costs is essential to support the company's competitive position in the long run. The relatively lower competitive advantage of U.S. ethane producers since the last quarter of 2014 remains quite positive for Braskem, as it increases the company's competitiveness. Nevertheless, Fitch expects this gap to marginally widen again in 2017. The full ramp-up of BI will lower Braskem's reliance upon naphtha as a feedstock to 42% from 48%.
As of June 30, 2016, the project was operating at 32% capacity. This project will improve the company's overall competitive position once it becomes fully operational in 2017, and Fitch foresees EBITDA margins being in the range of 40%-50% (this compares with Braskem's margins in Brazil of 12%-16%). The impact on Braskem's cash flow generation will be limited in 2016 and 2017 due to the ramp-up of the project. No dividends inflow from this project is incorporated into Fitch's base case scenario before 2018.
Record Free Cash Flows
The scenario of healthy petrochemical spreads, mostly as a result of the sharp decline in oil prices, tightness in polypropylene (PP) supply in key markets such as the U.S. and Europe and the strong appreciation of the USD dollar versus the Brazilian real has been supporting record operating cash flow generation (CFFO). With its revenues almost entirely linked to the USD and around 80% of its cost of goods sold (COGS) in USD, Braskem's CFFO is affected positively by a strong USD. Weakness of the Brazilian real has also allowed the company to export its products to compensate for the weak economic conditions in Brazil.
For 2017, Fitch continues to expect favorable spreads, despite some potential volatility in oil prices, which should continue to drive the company's ability to generate robust positive free cash flow (FCF) generation. Under Fitch's base case scenario, Braskem's CFFO, EBITDA and FCF for 2016 are expected to be approximately BRL6.3 billion, BRL11 billion and BRL1.4 billion, respectively. These figures are expected to show some deterioration during 2017 as result of relatively lower petrochemical spreads and an appreciating Brazilian real. In 2017, Fitch projects BRL5.5 billion of CFFO, BRL9.7 billion of EBITDA and BRL1 billion of positive FCF.
Leverage to Remain Low; Shareholder-Friendly Moves Remain a Credit Concern
The improvement in operating cash flow during 2016 led to strong FCF generation despite record dividends distribution of BRL2 billion. For 2016, Fitch projects Braskem's leverage to reach 1.8x, a decline from 2.3x during 2015 and 3.1x in 2014. Leverage is expected to stay below 2.5x over the next three years. Fitch's base case considers dividend payouts of 50% in the next three years and any relevant deviation from that may pressure its leverage ratios. Risk of extraordinary dividends is a credit concern due to the weak financial profile of the company's two key shareholders - Odebrecht Group (not rated) and Petroleo Brasileiro S.A. (Petrobras; LT FC IDR 'BB'/Negative Outlook).
Lava Jato Developments Remain a Risk
Uncertainties surrounding the corruption investigations by authorities in Brazil and the U.S. add risks to Braskem's ratings. The result of these actions could lead to a sizeable fine, damage to the company's reputation and difficulty in accessing capital markets. Fitch has low visibility as to the potential outcome of fines, or the expected timeline of such payments. Fitch's base case considers that the company would reduce dividends to a minimum level in a scenario of sizeable fines and would maintain net leverage below 2.5x in the medium term. This scenario does not include any relevant swing in the petrochemical's sector fundamentals such as an increase in oil prices to above USD65 per barrel or a sharp deterioration in spreads during 2017.
--Braskem's financial figures are on a standalone basis and do not include the debt or cash position of Braskem Idesa S.A.P.I. (Braskem Idesa);
--Export volumes continuing to offset Brazil's weakening economic performance, total volumes growing by low single digit in 2017 and 2018;
--Upward trend for naphtha prices following Fitch's oil price deck for WTI of USD45 in 2017 and USD65 in the long term;
--Narrowing polyethylene PE spreads giving naphtha price increases, while PP margins in U.S. remaining solid until mid-mid-2018;
--No dividends received from the Mexico Project until 2018;
--Dividend payouts of 50% net income.
Positive rating actions are unlikely in the medium term. While the Mexico project is not mature, Braskem remains a relatively high-cost producer based on naphtha and highly exposed to the industry's price volatility. Ongoing developments in the corruption investigations remain a concern.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Negative developments in the Lava Jato investigation;
--Higher than expected request of dividends by the shareholder;
--Net adjusted leverage above 2.5x on a sustainable basis.
--A change in Braskem's management strategy that alters its adequate financial profile with robust liquidity position and long-term debt schedule.
Braskem has a strong track record of maintaining a robust liquidity position. Company management has adopted a conservative and proactive financial strategy to limit the risks associated with its exposure to the cyclical and capital-intensive nature of its business. The company has a strong cash position and a manageable debt amortization profile with BRL7.1 billion of cash and marketable securities as of June 30, 2016, not including Braskem Idesa. Liquidity is further supported by USD750 million and BRL500 million of undrawn standby credit lines due 2019. These compare positively with BRL2.7 billion of short-term debt plus BRL4.4 billion until 2018. As of June 30, 2016, Braskem had BRL24.9 billion of total adjusted debt, calculated as per Fitch's methodology.
Fitch has affirmed the following ratings:
--Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB-'; Outlook revised to Stable from Negative;
--Long-Term Local Currency IDR at 'BBB-'; Stable Outlook;
--Long-Term National rating at 'AAA(bra)'; Stable Outlook;
--Unsecured senior notes due 2017 at 'BBB-'.
Braskem Finance Limited
--Unsecured senior notes due 2018, 2020, 2021, 2022 & 2024 at 'BBB-';
--Unsecured senior perpetual bonds at 'BBB-'.
Braskem America Finance Company
--Unsecured senior notes due 2041 at 'BBB-'.
The Rating Outlook for Braskem's foreign currency IDR was changed The Outlook for Braskem's local currency IDR and National Scale ratings remains Stable.
Date of Relevant Rating Committee: Sept. 29, 2016.
Additional information is available at www.fitchratings.com
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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