29.06.2016, 21:43

Fitch Affirms LafargeHolcim at 'BBB'; Withdraws Lafarge's IDR

OREANDA-NEWS. Fitch Ratings has affirmed Switzerland-based building materials group LafargeHolcim Ltd's (LafargeHolcim) Long-term Issuer Default Ratings (IDR) at 'BBB'. The Outlook is Stable. Fitch has also downgraded LafargeHolcim's Short-term IDR to 'F3' from 'F2' and withdrawn Lafarge SA's Long-term IDR and senior unsecured rating. A full list of rating actions is below.

The affirmation of LafargeHolcim's Long-Term IDR reflects Fitch's expectation that the company will deleverage following the merger of Holcim Ltd and Lafarge SA, and the combined group's improved scale, diversification and market positions. The downgrade of the Short-Term IDR reflects internal liquidity ratios that are more commensurate with a 'F3' rating. The group's external liquidity remains strong.

The Stable Outlook reflects our expectation that LafargeHolcim will use its growing annual free cash flow (FCF; CHF1bn by 2018) to delever and improve credit metrics to a level commensurate with the ratings over the next 12 to 18 months. We expect synergies, divestments, capex discipline and financial savings to more than offset growing dividends.

Fitch has withdrawn Lafarge SA's ratings as LafargeHolcim Ltd has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings. Accordingly, Fitch will no longer provide ratings (or analytical coverage) for Lafarge SA.

KEY RATING DRIVERS

Diversification Boosts Business Profile

LafargeHolcim's ratings are supported by its strong business profile and its number one global market positions. Boosted by the merger, its manufacturing footprint is one of the most geographically diverse among its peers. Fitch believes LafargeHolcim's cash flow stability has improved following the merger, offsetting more cyclical trends in the building materials sector, which is exposed to regional construction cycles with differing local economic, weather, regulatory and socio-political dynamics.

Performance Weaker Than Peers

Fitch expects LafargeHolcim's trading performance to be weaker than that of its peers such as CRH and HeidelbergCement, due to LafargeHolcim's lower exposure to North America. Fitch expects European building materials markets to perform worse than North American markets, although this is factored into the ratings. However, Fitch expects the group's near-term trading to improve in line with improving global construction.

Fitch assumes that any synergy benefits will be offset by restructuring costs resulting from the merger, depressing margins. Emerging markets growth, previously a benefit for LafargeHolcim, is also slowing. We also expect flat to decreasing capacity utilisation due to new capacity in these markets.

Synergies Achievable

Fitch believes that synergies from the merger will support earnings in the long term and improve resilience in downturns. We consider announced synergies ambitious, but achievable, given the scale of the merged companies and their overlapping business models. LafargeHolcim is targeting CHF1.1bn of EBITDA benefit by end-2017 through cuts in operating, procurement and selling, general & administrative (SG&A) costs and additional growth initiatives. While the pace of operating improvement was 30% ahead of management's target in 2015, we remain conservative in our forecast until we have further proof of success and are phasing in incremental synergies at a slower pace.

Financial Discipline Supports Deleveraging

Fitch views the new management's comprehensive programme to contain working capital, capex and funding costs and optimise capital allocation through disposals as credit positive. We forecast funds from operations (FFO) adjusted net leverage to reduce over the next 12 to 18 months to below 3.5x, within guidance for the ratings.

This assumes around CHF2bn in disposals over the next two years, of which more than half had been secured at March 2016. The group also has a good track record in managing its working capital. Accumulated cash savings from reduced working capital amounted to CHF1.4bn over the past four years and we consider management's target of achieving another CHF450m achievable.

Minority Adjustments Discontinued

Fitch now fully consolidates Indian subsidiaries ACC Limited and Ambuja Cements Ltd, which LafargeHolcim owned 50.4% at end-2015. Fitch's previous deconsolidation of minority interests resulted in adjustments of less than 10% of group earnings and cash flow, following the merger. However, we continue to adjust for cash and short-term investments held at these subsidiaries, as they are deemed not freely available for debt repayment without dividend upstreaming to the parent.

KEY ASSUMPTIONS

- Buoyant demand in North America, diverging trends in Europe.

- Slowing growth in emerging markets, weakness in China, Russia and selected Latin American countries.

- Initial margin pressures from restructuring costs, but long-term improvements from incremental synergies delivered over the rating horizon.

- Annual capex of around CHF2.0bn.

- Cumulative disposals of around CHF2.0bn in 2016 and 2017.

- Continued working capital savings.

- Progressively growing dividends.

RATING SENSITIVITIES

Negative: Future developments that may individually or collectively result in negative rating action include:

FFO gross above 4.0x and net leverage above 3.5x, EBIT margin below 10% or negative FCF.

Positive: Future developments that may individually or collectively result in positive rating action include:

FFO adjusted gross leverage below 3.0x, net leverage below 2.5x and materially positive FCF.

The Short-term Rating could be upgraded to 'F2', if internal liquidity ratios improve, so that FCF to EBITDAR is above 20%, last year-end available cash to short-term debt represented in year is above 80% and FFO to debt service is above 1.5x.

LIQUIDITY AND DEBT STRUCTURE

'F3' Internal Liquidity

The downgrade of the Short-Term Rating reflects internal liquidity ratios that are more commensurate with a 'F3' rating, including FCF to EBITDAR below 20%, last year-end available cash to short-term debt represented in year of below 80% and FFO to debt service of below 1.5x.

Comfortable External Liquidity

Liquidity amounted to CHF10bn at end-15 and consisted of CHF3.3bn cash available for debt payment and CHF6.7bn undrawn committed bank facilities. This is more than sufficient to cover CHF6.9bn in debt maturities in 2016. Coupled with positive FCF, we expect the group to be able to cover its debt maturities in 2016 and 2017.

Active Liability Management

LafargeHolcim's liability management is positive for the ratings, as it reduces the group's interest burden and extends a debt maturity profile that featured large debt maturities in 2016 and 2017 at end-15. The group repurchased EUR1.1bn of Lafarge S. A.'s issued notes maturing 2017 to 2020. This follows the repurchase of CHF3.0bn in bonds in 2H15, the majority with maturities between 2016 and 2018. Management intends to extend the average debt maturity to above five years.

FULL LIST OF RATING ACTIONS

LafargeHolcim Ltd

Long-term IDR: affirmed at 'BBB'; Outlook Stable

Short-term IDR: downgraded to 'F3' from 'F2'