OREANDA-NEWS. Fitch Ratings has affirmed German chemical group BASF SE's Long-Term Issuer Default Rating (IDR) at 'A+' and Short-Term IDR at 'F1'. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

The ratings are supported by BASF's strong product and geographical diversification, its leading market positions, longstanding customer relationships, integrated operating model (Verbund), strong EBITDA margins, sound liquidity and capital structure, and demonstrated access to capital markets. Over the last two years, BASF's earnings have demonstrated strong stability given the significant volatility in some of their underlying markets.

KEY RATING DRIVERS

Chemetall Acquisition Pressures Leverage

We expect the recently announced USD3.2bn acquisition of Chemetall to result in BASF exceeding the negative guideline level of 2.0x funds from operations (FFO) net adjusted leverage. We expect pro-forma leverage of around 2.2x at end-2016 before deleveraging towards the rating guideline of 2.0x in 2017. The company has a strong track record of effectively managing its financial profile and we expect that investment and cash deployment will be managed conservatively in order to minimise the negative impact on the group's credit metrics. Should our expectations for deleveraging not be met, we would likely take negative rating action.

Limited Impact From Low Oil Price

Despite the group's large oil and gas operations, the natural hedging of oil and gas production with feedstock and energy consumption in other divisions has limited the impact on BASF's financial metrics. In 2016 we expect the continued weakness in oil and gas pricing to have a material negative impact on the upstream divisions, supported by continued strength in downstream parts of the business.

Large Scale, Integrated, Diversified

BASF is the world's largest chemicals producer with 2015 sales of EUR70.4bn and production facilities worldwide. Its geographic diversification provides the company economic diversification, and reduces exposure to changes in global pricing trends. The company has a significant speciality chemicals portfolio where correlation with classical chemicals is lower. In commodity chemicals, the group's scale and integrated plants allow for production at a competitive cost. Significant vertical integration also allows the company to internally consume a large proportion of its intermediates production, where volatility is often highest.

Reducing Investment

Following several years of high investment, capex is guided by the company to fall to EUR4.8bn in 2016 from EUR5.8bn in 2015. The company has delayed a final decision on the construction of a large methane-to-propylene facility on the US Gulf coast that had aimed to take advantage of the cost advantage of cheap US shale gas supplies. With global oil and gas pricing far lower than when the project was initially contemplated, the relative advantage has been eroded.

Gazprom Asset Swap Neutral

On 30 September 2015 BASF finalised an asset swap deal with Gazprom, under which the German company contributed its share in the previously joint operated gas trading and storage business in exchange for a 25% share in two Siberian gas fields. The asset swap is consistent with the company's strategy to gain more exposure to regions with high upstream growth potential. Gas prices are lower than when the deal was originally planned, so the new gas fields are unlikely to generate as much income as originally anticipated. However, the loss in income from the low margin gas trading business is minimal, and we expect some recovery in pricing by the planned production start date of 2018.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for BASF include:

- Significant revenue reduction of around 17% due to loss of the gas trading & storage business.

- Sales volume increases for chemicals, performance products and functional solutions due to weak euro and increased industrial production. Agricultural solutions volume growth driven by product launches.

- Oil revenues move with the Fitch price deck of USD35/bbl for 2016, USD45/bbl for 2017 and USD55/bbl for 2018. Gas revenues move in line with Fitch price deck of USD5.0/mcf for 2016, USD6.0/mcf for 2017 and USD6.5/mcf for 2018.

- Net acquisitions of around EUR2bn in 2016; around neutral thereafter.

- Capex in line with management guidance of 4.8bn in 2016, EUR4bn thereafter.

- 3% dividend increase per year.

- EUR750m cash restricted for intra year operating requirements.

RATING SENSITIVITIES

Positive rating action is unlikely as Fitch regards 'A+' as a ceiling for ratings in the chemicals sector due to the inherent cyclicality.

Future developments that could lead to negative rating action include:

- Shareholder-friendly policies or large debt-funded acquisitions that could weaken the group's financial structure and result in a sustained increase in net FFO leverage above 2.0x (end-2015: 2.0x).

- EBITDA margin consistently below 12%.

- Sustained negative free cash flow (FCF).

LIQUIDITY

Comfortable Liquidity

As of 31 March 2016 liquidity is deemed as comfortable, supported by EUR3.3bn in cash (net of a EUR750m adjustment Fitch makes for operating cash requirements), EUR6bn in unutilised, committed bank facilities and forecast positive FCF against short-term maturities of EUR6.5bn. As of end-2015, financial indebtedness comprised bonds (69%), loans (20%) and commercial paper (11%). The bulk of the debt is EUR and USD denominated (63% and 24%, respectively), with the balance in various currencies.

FULL LIST OF RATING ACTIONS

BASF SE

- Long-Term IDR: affirmed at 'A+'; Outlook Stable

- Short-Term IDR: affirmed at 'F1'

- Senior unsecured debt: affirmed at 'A+'

Ciba Speciality Chemicals

- Senior unsecured debt: affirmed at 'A+'