OREANDA-NEWS. Fitch Ratings has placed Ireland-based building materials company CRH plc's (CRH) Long-term Issuer Default Rating (IDR) and senior unsecured rating of 'BBB' on Rating Watch Negative (RWN). The 'F2' Short-term IDR has also been placed on RWN. This follows the group's announcement that it is in discussions with Lafarge SA and Holcim Ltd regarding the potential acquisition of certain assets being disposed.

The 'BBB' senior unsecured ratings for subsidiaries CRH America Inc., CRH Finland Services Oyj, CRH Finance BV, CRH Finance UK, CRH Finance Limited, CRH Finance Germany GmbH and CRH Finance Switzerland AG, have also been placed on RWN.

The RWN reflects the uncertainty and the potentially negative impact on CRH's credit metrics from an acquisition of certain assets as a result of the merger of Holcim and Lafarge companies. Although there is no certainty that the discussions will result in a transaction, the potential acquisition could be sizeable relative to CRH and could reduce CRH's financial headroom. The prospective acquisition would be funded through a combination of existing cash balances, debt and capital increase and we consider the final funding mix crucial to the outcome of the Rating Watch.

Depending on the funding mix, a large acquisition could increase funds from operations (FFO) adjusted gross leverage to above 4.0x at end-2015, our current guideline for CRH's 'BBB' rating. We intend to resolve the RWN once Fitch has received confirmation of a transaction, the transaction value, the scope of assets and the deal financing structure.

Excluding the potential acquisition Fitch notes that CRH has made progress towards reducing its leverage to a level more consistent with the current 'BBB' rating. If the transaction does not go ahead, Fitch expects CRH's FFO adjusted gross leverage to have declined to below 4.5x in 2014, before falling further to below 4.0x in 2015, from 5.0x in 2013, due to positive free cash flow (FCF) generation and proceeds from asset disposals.

KEY RATING DRIVERS

Potential Transformational Deal
Acquiring certain assets disposed of by Holcim and Lafarge ahead of their merger could be transformational for CRH. An acquisition of assets in emerging markets would improve the group's geographical diversification, which has been lagging its pure-play cement peers. An acquisition of the European assets would reinforce CRH's presence on its home continent and could more than double its cement and aggregates capacity. The consolidation of higher- margin, cash-generative assets would also improve the group's earnings and cash margins.

Improving Current Trading
We expect EBITDA growth of around 10% to EUR1.6bn for 2014 based on favourable performance for the first nine months and assuming a repeat of the solid 4Q results of the same period a year ago. Improving margins in the materials and products division, both in Europe and America, are so far driving profit growth, with results from the low-margin distribution segment largely flat.

Diverging Regional Trends
CRH's performance showed divergent trends in key end-markets in Europe and the Americas in 2014. In Europe, better performance in 1H yoy was driven by favourable weather while the Americas showed encouraging signs from construction material demand, particularly in 2H.

Portfolio Review Completed
CRH completed its portfolio review by identifying a multi-year divestment programme of around EUR1.5bn-2bn in 3Q14. For 2014 it realised 16 disposal transactions for a total consideration of EUR0.35bn, and completed acquisitions for EUR0.19bn. In addition, last December CRH announced the divestment of its clay and concrete businesses in the UK and its clay business in the U.S. for an enterprise value of EUR520m. This transaction, subject to regulatory approval, is expected to close in 1H15.

RATING SENSITIVITIES

Negative: Future developments that could lead to negative rating action include:
- Large debt-funded acquisitions or deteriorating operating performance, resulting in adjusted net debt/EBITDAR above 3.0x (2013: 3.3x) on a sustained basis or FFO adjusted gross leverage above 4.0x (2013: 5.0x) on a sustained basis
- EBIT margin below 5% (2013: 4.2%) on a sustained basis
- FCF margin below 1% (2013: 1.1%) on a sustained basis

Positive: Future developments that could lead to an affirmation include:
- Abandoning discussions for the acquisition of certain assets sold by Lafarge and Holcim
- Cash- or equity-funded acquisitions, resulting in adjusted net debt/EBITDAR below 3.0x or FFO adjusted gross leverage below 4.0x on a sustained basis
- EBIT margin above 5% on a sustained basis
- FCF margin above 1% on a sustained basis