Fitch Affirms Braskem's IDR at 'BBB-'; Outlook Revised to Stable

RIO DE JANEIRO--()--Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of Braskem S.A. (Braskem) and its subsidiaries at 'BBB-'. Fitch also affirms Braskem's national scale rating at 'AA+ (bra)'.

The Rating Outlook for Braskem's corporate ratings has been revised to Stable from Negative.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The Rating Outlook revision incorporates Fitch's belief that Braskem's credit profile, while weakly positioned within the current rating, will strengthen over the medium term. This is the result of a positive trend for cash flow recovery as result of expected lower equity investments in the competitive Mexico's XXI Ethylene Project, medium-term tax reliefs, healthy petrochemical spreads and BRL depreciation. Per Fitch's base case scenario, EBITDA margins are expected to slightly exceed 12%, which, coupled with lower capital expenditures, will improve the company's ability to deliver increasing free cash flow (FCF) metrics during 2015, and will lower leverage to below 2.5x, which is in line with the assigned rating category.

The Outlook revision also factors in Braskem's strong commitment to maintaining a robust financial profile and to carefully managing its growth strategy in order to avoid pressuring its capital structure. The revision also reflects the reduced execution risks surrounding the Mexico project, which, once completed, could improve Braskem's competitive position as it gains access to lower cost raw materials, ethane. Fitch also believes that the naphtha supply agreement with Petrobras should not have material changes.

KEY RATING DRIVERS

Braskem's ratings reflect its leading position in the Latin American petrochemical sector, and as the main thermoplastic resin producer in Brazil with ongoing challenges as a global high cost producer. The ratings also reflect ownership stakes held by Grupo Odebrecht and Petroleo Brasileiro S.A (Petrobras; local and foreign currency IDR of 'BBB' with a 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.

High Production Costs Challenges Robust Business Position

Braskem's strategy to diversify its feedstock matrix and access it at a more attractive cost is essential to supporting the company's competitive position in the long run. Braskem's large dependence on naphtha, which represents 70% of Braskem's total feedstock, currently position it as a high cost producer.

In years past, in a scenario of depressed petrochemical spreads, the company was not able to implement a pass-through of higher raw materials prices due to fierce competition from imports. This was despite having a market position in Brazil of almost 100% in thermoplastic resins production and about 70% of the domestic sales market.

Positively, Braskem is about to conclude a greenfield polyethylene project in Mexico that should improve the company's overall competitive position once it becomes fully operational in 2016. The impact upon Braskem's cash flow generation will be limited however, as the plant is projected to generate only robust cash flow to shareholders from 2017 on.

Operating Cash Flow Recovery Still Sensitive

Braskem's operating cash flow is sensitive to fiscal incentives, a scenario of stronger petrochemical spreads, and the appreciation of the USD dollar versus the Brazilian real. Uncertainties regarding the pace of global macroeconomic growth still pose pressures on the expected petrochemical's tight prices cycle in 2015/16. Nevertheless, the continued delay in new capacity coming on line for 2017 onwards should bring some uptrends for the prices during the near term. Fitch's base case forecast incorporates an improving scenario of petrochemicals spreads compared to the average of the last 2 years.

During 2013, Braskem's operating cash flow was supported by BRL650 million in tax relief and should achieve BRL1 billion in 2014 and 2015, BRL650 million in 2016 and BRL120 million in 2017, when the incentives are scheduled to be rescinded. Fitch's base case scenario foresees BRL3.5 billion in Funds From Operations (FFO) and BRL5.5 billion in EBITDA in 2014. These figures compare favorably with BRL3 billion and BRL4.8 billion, respectively, in 2013.

Continued Deleverage Trend is Expected To Continue

The expected improvement in operating cash flow during 2015 coupled with lower capex should drive Braskem's free cash flow generation to the positive range and allow a debt reduction. Braskem's equity investments in the competitive Mexico's XXI Ethylene Project, which amounted to BRL1.7 billion up to June 2014, have also pressured the company's credit profile over the last two years. For 2014, Fitch projects Braskem's leverage to reach about 2.8x, a decline from 3.3x during 2013 and 4.5x in 2012. Leverage should then decline to below 2.5x in 2015.

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 BRL3.3 billion of cash and marketable securities as of June 30, 2014. The company's liquidity position is further supported by BRL450 million and USD600 million of undrawn standby credit lines due 2015 and 2016, without material adverse change clauses. These levels of liquidity compare with BRL1.4 billion of short-term debt. As of June 30, 2014, Braskem had BRL19.4 billion of total adjusted debt. This debt incorporates BRL949 million debt of tax related debt (Refis).

RATING SENSITIVITIES

Braskem's failure to increase its cash flow generation or to lower leverage in 2015 to 2.5x could lead to a rating downgrade. Braskem's performance is strongly focused on the Brazilian economy, as around 60% of its revenues are generated in the local market. A long 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 in the medium-term given the company's business position and industry's cyclicality.

Fitch has affirmed the following ratings:

Braskem S.A.

--Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-';

--Long-term local currency IDR at 'BBB-';

--Long-term national rating at 'AA+(bra)';

--Unsecured senior notes due 2017 at 'BBB-'.

Braskem International Ltd

--Unsecured senior notes due in 2015 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-'.

In addition, Fitch has also withdrawn the following ratings:

Braskem Finance Limited

--Long-term foreign currency IDR at 'BBB-';

Braskem America Finance Company

--Long-term local and foreign currency IDR at 'BBB-';

Braskem International Ltd.

--Long-term foreign currency IDR at 'BBB-';

These ratings were withdrawn as these entities are no longer considered analytically meaningful for the credit quality of the notes that have been issued out of them. All of the aforementioned notes that have been issued by these special purpose entities were fully guaranteed by Braskem and the ratings of those issuances remain outstanding.

The Rating Outlook for Braskem's corporate ratings has been revised to Stable from Negative.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=888794

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Contacts

Fitch Ratings
Primary Analyst
Debora Jalles, +55-21-4503-2629
Director
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20
Centro - Rio de Janeiro - RJ
or
Secondary Analyst
Ricardo Carvalho, +55-11-4504-2607
Senior Director
or
Committee Chairperson
Dan Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Debora Jalles, +55-21-4503-2629
Director
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20
Centro - Rio de Janeiro - RJ
or
Secondary Analyst
Ricardo Carvalho, +55-11-4504-2607
Senior Director
or
Committee Chairperson
Dan Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com