OREANDA-NEWS. Fitch Ratings has affirmed Germany-based chemicals group Lanxess AG's (Lanxess) Long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB-' with Stable Outlook. The agency has simultaneously withdrawn all the ratings. The ratings are no longer considered by Fitch to be relevant to the agency's coverage.

The affirmation reflects Fitch's belief that Lanxess will continue to confront the prolonged downturn in the synthetic rubber sector with the ongoing restructuring programme. Following the successful EUR430m equity issue in mid-2014, Lanxess aims to deliver at least EUR150m cost savings by end-2016 together with capex reduction and structure optimisation via optional M&A arrangements. We note that management's demonstrated intent and track record mitigate the execution risk of the restructuring programme.

KEY RATING DRIVERS
Structural Weakness in Synthetic Rubbers
Synthetic rubbers continue to show little signs of recovery in 2014-2015 on historically low raw material prices (butadiene), weaker demand than anticipated in high growth markets, and overcapacity and competitive pressures, particularly in ethylene propylene diene monomer (EPDM) and butyl rubber markets. While Lanxess has announced measures to address some of these issues, it remains heavily exposed to the pricing volatility and demand pressure that are likely to affect this market in the near to medium term.

Base Case Assumptions
Our base case assumes little recovery in performance polymer prices from the current levels and a modest volume improvement from 2015 onwards as capacity utilisation increase and the new plants are ramping up. Strong performance in Advanced Intermediates and Performance Chemicals should support profitability, in line with 3Q14 results, although we expect a slight margin reduction in 4Q14.

We project EBITDA close to Lanxess's EUR808m guidance for FY14. Free cash flow (FCF) will remain negative in 2014 and 2015 until the large EPDM and neodymium polybutadiene rubber projects ramp up by 2016. We assume EUR650m capex in 2014. From 2016 onwards, cash flow generation should be aided by the ramp up of the new plants, gains from restructuring measures, improved capacity utilisations and lower capex. We forecast a margin improvement to 10%-11%, which remains below historical levels.

Deleveraging Expected
Lanxess's net FFO leverage was 2.2x at end-9M14 against our base case forecast of 2.1x. We expect the ratio at 2.4x-2.6x in 2015 and stabilise below 2.5x by end-2016 as a result of the focus on debt reduction and improved cash flow generation. The group redeemed a EUR500m bond due April 2014, and used a EUR430m capital increase in May 2014 to reduce debt and fund restructuring measures.

LIQUIDITY AND DEBT STRUCTURE
Lanxess had cash balances of EUR275m and marketable securities valued at EUR241m at end-3Q14, and its EUR1.25bn undrawn committed revolving credit facility maturing in 2019 (no covenants). This compared well with current financial liabilities of EUR206m. Short-term cash requirements include capex of around EUR650m in our base case and dividends of EUR46m. We expect FCF to be negative under the base rating case in 2014-2015 and to revert to positive in 2016 following completion of the greenfield projects.