OREANDA-NEWS. Fitch Ratings has affirmed Netherlands-based chemicals group Royal DSM N.V.'s (DSM) Long-term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook and Short-term IDR at 'F2'. DSM's senior unsecured debt has also been affirmed at 'A-'.

The ratings reflect DSM's position as one of the world's leading specialty chemicals groups, holding significant market positions across its broad portfolio of products. DSM's sales are well diversified by geography, product and customer and the company's portfolio restructuring has resulted in an increased exposure to the less cyclical nutrition subsector and a reduction in more volatile petrochemical linked revenues. DSM is continuing its expansion into high-growth Asian markets, with emerging economies accounting for about 26% of total sales in 2014. The ratings are constrained by DSM's exposure to economic and industry cycles, volatile raw material and energy prices.

KEY RATING DRIVERS
Polymer Intermediates Exit
In March 2015, DSM announced the partial disposal of its Polymer Intermediates and Composite Resins businesses, which had 2014 sales of EUR2.1bn and EBITDA of EUR106m. The new joint venture, Chemicalnvest B.V. has been formed, 65% owned by private equity company CVC Capital Partners and 35% owned by DSM. The transaction was completed on 31 July 2015 with cash proceeds to DSM of EUR300m-EUR350m. The exit from the cyclical petrochemical-linked business, which suffers from market overcapacity, is positive for DSM's business profile, creating a more speciality-focused chemical and nutrition producer.

Exit Strategy for Existing JVs
Overcapacity and weak margins meant the pharmaceutical division ceased to exist in 2014 with DSM instead transferring the business off balance sheet through JVs, and equity accounting for its 50%-owned DSM Sinochem Pharmaceuticals JV and its 49%-owned DPx Holdings B.V. JV, which combined DSM Pharmaceutical Products with US company, Patheon.

DSM does not have the benefit of substantial dividend receipts from its JVs and has instead faced write downs that have affected operating profit by around -EUR300m for both of the past two years, increasing funds from operations (FFO) adjusted net leverage to 2.75x at FY14 from 1.9x at FY13. DSM should unlock value following the sale of their JV stakes with proceeds expected to help reduce leverage to within guidelines. Timing on the potential sale of these stakes is unknown and therefore they are not included in the forecast. Market estimates value DSM's Pharmaceutical and Polymer JVs at around EUR1.5bn-EUR2.0bn.

Peak Leverage in 2014
FY2014 FFO adjusted net leverage of 2.75x is beyond guideline leverage of 2x due to the deconsolidation of pharmaceutical cash flows and limited dividends from JVs, higher cash interest paid due to the settlement of a pre-hedge and high share repurchases. Fitch forecasts leverage will come to within guidelines from 2015 onwards considering DSM's strong 1H15 performance and assuming limited exceptional implications from the Polymer JV.

FX Supporting Results
Performance in 2015 has been supported by higher volumes and positive FX effects. The weak euro is supporting the company where pricing is primarily in USD, particularly as hedges run off. FX may contribute EUR40m-EUR50m over 2015, offsetting some of the weakness in vitamin E pricing.

Product Mix Underpins Ratings
DSM's geographical and end-market diversification support stable cash flow generation through the cycle, and its recent acquisitions have resulted in an increased exposure to the less cyclical nutrition sector. However, the company remains exposed to economic and industry cycles, and to volatile raw material, FX and energy prices.

KEY ASSUMPTIONS
- Closure of polymer intermediates and composite resins disposal in 2H15, with EUR325m cash proceeds. No dividend income anticipated thereafter, and exit not expected within rating horizon.
- No dividends expected from pharma JVs, and potential proceeds from an exit not included within the rating horizon.
- EBITDA margin of around 17% in nutrition and 13-14% in performance materials in 2015.
- Low-single digit organic revenue growth from 2016.
- Flat dividends paid in 2015, increasing steadily thereafter.
- Capex reducing to around EUR500m/year from 2016.

RATING SENSITIVITIES
Future developments that could lead to negative rating action include:
-Use of receipts from sale of JV stakes in M&A with a failure to demonstrate deleveraging to net FFO adjusted leverage of below 2.0x (end-2014: 2.75x).
- An underlying EBITDA margin consistently below 10%.

Future developments that could lead to positive rating action include:
- Further reductions in exposure to cyclical sub-sectors, along with FFO net adjusted leverage sustained at or below 1.0x.
- Improving operational performance with EBITDA margins consistently around 20% and lower volatility in the performance materials segment resulting in consistent revenues and improved profit margins.

LIQUIDITY AND DEBT STRUCTURE
Liquidity is supported by cash positions of EUR765m at end-1Q15 and two committed revolving credit facilities of EUR500m maturing in 2018 and 2020. Total borrowings maturing in less than one year were EUR1,401m at end-1Q15. Under our base case, free cash flow remains neutral to slightly positive over 2015-16, and we anticipate proceeds from the PI & CR JV of EUR300-350m in 2H15.