OREANDA-NEWS. S&P Global Ratings said today that it assigned its 'B+' long-term corporate credit rating to INEOS Styrolution Holding Ltd (Styrolution), a holding company of Germany-headquartered styrenics producer INEOS Styrolution Group GmbH (Styrolution Group). The outlook is stable.

We also assigned our 'BB-' issue rating to Styrolution Group's proposed €1.1 billion first-lien senior secured term loan. The recovery rating on these facilities is '2', indicating our expectation of recovery prospects for creditors in the lower half of the 70%-90% range in the event of payment default.

At the same time, we affirmed our 'B+' long-term corporate credit rating on Styrolution Group. The outlook is stable.

We also affirmed our existing 'BB-' issue ratings on Styrolution Group's first-lien term loan due 2019, which is split between a €517.12 million tranche and a $652.61 million tranche.

The final ratings will depend on our receipt and satisfactory review of all final transaction documentation. If S&P Global Ratings does not receive the final documentation within a reasonable time frame, or if the final documentation departs from the materials we have already reviewed, we reserve the right to withdraw or revise our ratings. Potential changes include, but are not limited to, utilization of loan proceeds, the maturity, size, and conditions of the loan, financial and other covenants, security and ranking.

Our ratings on the INEOS Styrolution companies reflect our opinion that the credit ratios have materially improved. Under our base case, we forecast S&P Global Ratings-adjusted (gross) debt to EBITDA of 1.7x at year-end 2016, and about 2.0x in 2017. This is a strong improvement from 4.9x in 2014 and comparable with the peak of 2.1x in 2015. However, notwithstanding the contemplated debt reduction by €200 million, we believe that the company could use cash flows to support growth initiatives and, potentially, debt-financed dividends in the future.

Considering that we calculate Styrolution's pro forma leverage on an adjusted gross basis, the key driver (in addition to the contemplated PIK repayment) behind the meaningful reduction in leverage is its EBITDA growth. This reflects a top-of-the-cycle industry environment in 2015 and 2016, with styrene benzene spreads of $280 per metric ton on average in the year to date, and over $330 per metric ton in 2015 (partly due exceptional cracker outages in the second quarter). Styrolution's profitability is additionally supported by cost-saving initiatives and synergies with INEOS.

We anticipate that strong industry conditions will continue in 2016 and well into 2017 on the back of ongoing robust demand for styrenics from the packaging, leisure, automotive, and household sectors in Europe and North America, which form about 80% of Styrolution's end-markets. Our forecast is notwithstanding weakening in Asia (notably China) affecting the polymer business, especially ABS (acrylonitrile butadiene styrene).

Under our base-case scenario, we forecast Styrolution to report high mid-cycle EBITDA after special items of about €740 million-€750 million in 2016 and €600 million-€620 million in 2017.

In our base-case, we assume:Reported EBITDA margin of about 17% in 2016, reflecting high mid-cycle conditions during the year, trending down to 14%-15% in 2017;Capital expenditure (capex) of about €140 million in both years; andDividends at about 50% of net income of the previous year. Based on these assumptions, we arrive at the following credit metrics:Adjusted debt-to-EBITDA ratio of about 1.7x in 2016, and about 2.0x in 2017 (based on adjusted gross debt of €1.3 billion).Strong free operating cash flow (FOCF) in both years. We continue to view Styrolution's business risk profile as constrained by the commodity-intensive nature of its products and its limited diversification as a pure-play styrenics producer. This implies high cyclicality of earnings and cash flows during periods of lower demand in the company's more cyclical end-markets--including consumer durables, packaging, automotive, and construction. In addition, volatility in raw material prices (such as benzene) could erode profitability.

Styrolution benefits from a large-scale, integrated, and cost-competitive asset base, as 75% of its production assets are positioned in the first and second quartile of the industry cost curve. In addition, we factor in the company's successful track record and focus on costs and efficiencies.

As an indirectly and fully-owned subsidiary of INEOS AG, we assess Styrolution's management and governance as fair, as we do for sister companies Inovyn and INEOS Group Holdings S. A. This reflects our view of the concentrated ownership of INEOS--100% of shares are held by only three individuals--and is partly offset by our opinion of management's entrepreneurial cost focus and industry knowledge.

We think Styrolution's future credit metrics could be weaker than our base case suggests because certain potential management actions--such as higher capex to support capacity expansions or debt-financed dividends--could contribute to higher leverage than we currently forecast.

At the same time, we view Styrolution as a moderately strategic subsidiary of INEOS AG, reflecting our understanding that INEOS' policy is to fund the group on a stand-alone basis. Therefore, the rating currently incorporates no adjustment for group support, and would likely remain at or below the 'b+' group credit profile of INEOS AG.

We view Styrolution's liquidity as adequate because we expect sources to comfortably exceed uses by at least 1.2x over the next 12 months. This factors in the fairly long-dated maturity profile; the proposed first-lien term loan is due 2021 and the securitization facility in 2019.

The securitization facility has no financial covenants, and remaining instruments have only incurrence-based covenants, while the company increased its capacity to raise about €175 million (up from €140 million before) in additional debt if the need arises.

Principal liquidity sources pro forma the transaction:About €320 million cash;€480 million-€500 million of cash funds from operations; andAbout €400 million available under the securitization program. Principal liquidity uses include:Undemanding debt amortization profile;Peak intra-year working capital needs of up to €140 million (as seen in the second quarter of 2016); andAbout €140 million in capex. The stable outlook reflects our view that Styrolution will be able to maintain a strong operating performance in the coming years, with EBITDA of about €740 million-€750 million in 2016 and €600 million-€620 million in 2017. This assumes a drop in styrene-to-benzene spreads to more normalized levels from top-of-the-cycle profits in 2015 and 2016. We forecast an adjusted ratio of (gross) debt to EBITDA of about 1.7x in 2016 and about 2.0x in 2017. This provides considerable headroom with the rating, which assumes leverage of between 2.5x-3.0x in top-of-the-cycle conditions, and between 4.0x-4.5x at the bottom of the cycle.

Rating pressure could develop due to a deteriorated market environment combined with releveraging through unexpected dividends or acquisitions, such that the ratio of adjusted (gross) debt-to-EBITDA rises to about 4x-5x.

We see a limited near-term likelihood of an upgrade given the volatility of the styrenics industry and Styrolution's relatively material gross debt. We also expect the company to remain ambitious and we think it may finance an expansion of the business partly with debt. A higher rating would therefore depend on Styrolution and its parent making a commitment to keep leverage sustainably below 3x, in combination with a wider improvement in the credit quality of the INEOS AG group.