RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' to Braskem Finance Limited's proposed notes issuance of approximately USD250 million due 2024, which will be unconditionally guaranteed by Braskem S.A. (Braskem). The issuance will rank pari passu with other unsecured and unsubordinated obligations of Braskem. The issuance proceeds will be used to refinance indebtedness.
Fitch currently rates Braskem as follows:
-- Long-term foreign Issuer Default Rating (IDR) 'BBB-';
-- Long-term local currency IDR 'BBB-';
-- National scale rating 'AA+(bra)'.
Braskem Finance Limited
-- Long-term foreign currency IDR 'BBB-'.
The Rating Outlook is Negative.
KEY RATING DRIVERS
Braskem's ratings reflect its leading position in the Latin American petrochemical sector, as the sole thermoplastic resin producer in Brazil and its ongoing challenges as global high cost producer. The ratings also reflect ownership stakes of Grupo Odebrecht and Petroleo Brasileiro S.A (Petrobras; local and foreign currency IDR of 'BBB', Stable Outlook by Fitch) in Braskem of 38.3% and 36.1%, respectively. Further factored into the company's ratings are its strong liquidity position and manageable debt amortization schedule.
Braskem's Negative Outlook reflects high leverage for the rating category. The company continues to take extraordinary measure - such as assets sales - to lower debt. Fitch envisages a potential positive trend for cash flow recovery as result of medium-term fiscal incentives, healthy petrochemical spreads and BRL depreciation. If this scenario materializes in 2014, the company's Rating Outlook should be revised to Stable.
High Production Costs Challenges Robust Business Position
Braskem's large dependence on naphta, which represents 70% of Braskem total feedstock, currently positioned it as a high cost producer. During 2011 and 2012, in a scenario of depressed petrochemical spreads, Braskem was not able to implement a pass-through of higher raw materials prices due to fierce competition with imports, despite having a market position in Brazil of almost 100% in thermoplastic resins production and about 70% of the domestic sales market. The company's position improved during 2013 due to the depreciation of the Brazilian real, healthy international petrochemical prices and initiatives by the Brazil government to support the competitiveness of the local industry through tax decreases. The company is also constructing a greenfield polyethylene project in Mexico that should improve Braskem's competitive position once it becomes fully operational in 2016. The impact upon the company will be limited; however, as the plant is projected to generate only about 25% of the company's future cash flow.
Operating Cash Flow Recovery Depends on Government Incentives and Favorable Scenario
Braskem's operating cash flow is sensitive to fiscal incentives, a scenario of stronger petrochemical spreads, and the appreciation of the U.S. dollar versus the Brazilian real. Fitch expects fiscal incentives to improve the company's cash flow by around BRL1 billion in 2014 and 2015, BRL650 million in 2016 and BRL120 million in 2017, when the incentives are scheduled to be rescinded. In 2013, the impact of fiscal incentive was BRL650 million. During 2013 Braskem generated BRL3.1 billion of funds from operations (FFO) and BRL4.8 billion in EBITDA. These figures compare favorably with BRL1.5 billion and BRL3.5 billion, respectively, in 2012.
Braskem has been able to sell BRL995 million of Fitch's expected amount of asset sale of BRL1.5 billion, with BRL315 million to be received through second quarter of 2014. The negative impact of its shortfall upon the company's goal of deleveraging has been mitigated to an extent by the combination of stronger cash flow generation. Fitch's expects free cash flow to be marginally positive in 2014. In 2013, Braskem's net leverage declined to 3.3x from the 4.5x in 2012. Leverage should then move below 3.0x in 2014 as the company receives a full years benefit from the tax reductions.
Proactive Liability Management/Robust Liquidity
Braskem's management has adopted a conservative and pro-active financial strategy to limit the risks associated with its exposure to the cyclic and capital intensive nature of its business. The company has a robust liquidity position and a manageable debt amortization profile with BRL4.4 billion of cash and marketable securities as of Dec. 31, 2013. The company's liquidity position is further supported by BRL450 million and USD600 million of undrawn standby credit lines due 2016, without material adverse change clauses. These levels of liquidity compare with BRL1.3 billion of short-term debt. As of Dec. 31, 2013, Braskem had BRL20.2 billion of total adjusted debt. This debt incorporates BRL1.1 billion debt of tax related debt (Refis) and excludes the project finance debt related to the project in Mexico of BRL3.3 billion that is a non-recourse project finance modality.
Braskem's inability to increase its cash flow generation or to reduce leverage in the medium term will lead to a rating downgrade. Braskem's performance is strongly focused on the Brazilian economy, as around 65% of its revenues are generated in the local market. A downturn of the economy would weaken the company's results and could also result in a negative rating action.
A rating upgrade is not likely until the company significantly improves its operational performance and/or substantially lowers its financial obligations. Continued strong performance throughout 2014 could result in the Rating Outlook being revised to Stable from Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
-- 'Corporate Rating Methodology' (Aug. 5, 2013);
-- 'National Ratings - Methodology Update' (Oct. 31, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective 12 August 2011 to 8 August 2012