Fitch Affirms Holcim at 'BBB'; Outlook Stable
The affirmation reflects our expectation that the proceeds from the disposal of the sale of global assets will support the merged entity's financial profile. The announcement marks a step towards, and removes uncertainty around, the successful completion of the merger between the two companies, creating a larger, more diversified company with improved market positions and substantial synergy potential.
KEY RATING DRIVERS
'BBB' Financial Profile
We forecast pro-forma funds from operations (FFO) adjusted gross leverage of 3.7x for the combined group in 2015. This compares with an estimated 3.5x for Holcim on a stand-alone basis in 2015, given Lafarge's higher leverage and the contemplated all-share merger, with no additional debt to be raised by either company.
Disposals to Improve Leverage
Proceeds from the sale of the global portfolio of assets to CRH, will improve the combined group's credit metrics and therefore financial flexibility. The higher-than-expected proceeds from the disposal will help mitigate a weaker-than-expected recovery in recent quarters.
Strong Business Profile
The announced merger between Holcim and Lafarge will create the world's largest building materials company, with estimated 2013 pro-forma sales of CHF33bn (EUR27bn). It will hold number one market positions in cement, aggregates and ready-mix products and benefit from the individual companies' complementary asset base in Latin America and Africa & Middle East.
Synergies
Management aims to reap CHF1.7bn (EUR1.4bn) in synergies over the next three years through best practice and cross-utilisation, cost savings and optimal capex allocation. In addition, the group plans to implement CHF500m in (EUR410m) in working capital savings over three years. These measures will support the credit profile of the combined group in the long-term, although associated costs will offset benefits in the near-term.
Cost Savings
We expect healthy cost savings at both Holcim and Lafarge to mitigate inflationary pressures in 2015. Following severe cost inflationary pressures in emerging markets in 2014, we expect the companies to offset some of the margin losses through price increases from healthy volume growth.
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating actions include:
- FFO adjusted gross leverage improving to below 2.5x and net leverage below 2.0x. Adjusted gross and net leverage is calculated by pro-rata consolidation of the Indian controlled subsidiaries
- Consolidated FFO adjusted gross leverage below 3.0x
- Consolidated free cash flow (FCF) materially positive
Negative: Future developments that could lead to negative rating action include:
- EBIT margin, pro-rata consolidated for the Indian subsidiaries, below 10%
- FFO adjusted gross leverage above 3.5x and net leverage above 3.0x, pro-rata consolidated for the Indian controlled subsidiaries
- Consolidated FFO adjusted gross leverage above 4.0x
- Consolidated FCF to remaining neutral to negative
FULL LIST OF RATING ACTIONS
The rating actions are as follows:
Holcim Ltd
Long-term IDR: affirmed at 'BBB'; Outlook Stable
Short-term IDR: affirmed at 'F2'
Senior unsecured debt: affirmed at 'BBB'
Holcim Capital Corporation Ltd.
Senior unsecured debt: affirmed at 'BBB'
Holcim Finance (Australia) Pty Ltd
Senior unsecured debt: affirmed at 'BBB'
Holcim Finance (Canada) Inc.
Senior unsecured debt: affirmed at 'BBB'
Holcim Finance (Luxembourg) S.A.
Senior unsecured debt: affirmed at 'BBB'
Holcim GB Finance Ltd. (UK)
Senior unsecured debt: affirmed at 'BBB'
Holcim Overseas Finance Ltd.
Senior unsecured debt: affirmed at 'BBB'
Aggregate Industries Holdings Limited (UK)
Senior unsecured debt: affirmed at 'BBB'
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