Fitch Affirms Braskem's IDR at 'BBB-'; Outlook Stable
KEY RATING DRIVERS
Braskem's ratings reflect its leading position in the Latin American petrochemical sector, current adequate credit metrics and the ongoing challenges as global high cost producer in a cyclical industry. In the near term, Braskem is expected to continue benefiting from the current low feedstock prices, particularly for naphtha, and high depreciation of Brazilian real. Further factored into the company's ratings are its track record of strong liquidity position and manageable debt amortization schedule.
Uncertainties regarding the naphta contract with Petroleo Brasileiro S.A. (Petrobras) continue to be a negative headwind for Braskem's ratings. Fitch uses 102% of the referenced naphtha Amsterdam-Rotterdam-Antwerp (ARA) price for its analytical base case forecast for the company. Material deviation from that or additional conditions not already incorporated may pressure Braskem's operating cash flow and impact the company's credit metrics and its ratings.
High Production Costs; Diversification Key:
Braskem's large dependence on naphtha, which represents 70% of its total feedstock, positions the company as a high cost producer. Braskem's strategy to diversify its feedstock matrix to lower production costs is essential to support the company's competitive position in the long run. The relatively lower competitive advantage of U.S.'s ethane producers since the last quarter of 2014 has been positive for Braskem as it increases the company's competitiveness. Nevertheless, Fitch expects this gap to marginally widen again in 2017.
Braskem is close to completing construction of a greenfield polyethylene project in Mexico that should improve the company's overall competitive position once it becomes fully operational in 2016. The impact upon Braskem's cash flow generation will be limited however, as the plant is projected to generate only robust cash flow from 2017 and onwards. In Fitch's base case scenario, the agency does not incorporate any relevant dividends inflow from this project before 2018.
Record High FCF Expected:
The scenario of healthy petrochemical spreads, mostly as a result of the sharp decline in oil prices, and the strong appreciation of the USD dollar versus the Brazilian real has been supporting a rebound in Braskem's operating cash flow generation (CFFO). For 2016, Fitch continues to expect favourable spreads, despite some potential volatilities in oil prices, which should continue to drive the company's ability to generate robust positive free cash flow generation.
Under Fitch's base case scenario, Braskem's CFFO, EBITDA and FCF for 2015 is expected to be approximately BRL5.8 billion, BRL8.5 billion and BRL1.7 billion, respectively. These figures compare favourably with BRL3.8 billion of CFFO, BRL5.6 billion of EBITDA and BRL805 million of positive free cash flow in 2014. Braskem EBITDA margin may improve to 18% in 2015 and 2016 from the 2011-14 average of 11%.
Deleverage Trend Expected to Continue
The expected improvement in operating cash flow during 2016, coupled with lower capex should make Braskem's FCF positive, which could allow for some debt reduction. For 2015, Fitch projects Braskem's leverage to reach about 2.4x, a decline from 3.1x during 2014 and 3.5x in 2013. Leverage is expected to stay below 2.5x over the next three years.
KEY ASSUMPTIONS
--Braskem's financial figures are on standalone basis. It does not include the debt or cash position of Braskem Idesa S.A.P.I (Braskem Idesa);
--Export volumes partially offset Brazil's weakening economic performance, total volumes growing by low single digit from 2016 on;
--Base Case Assumption considers Naphtha prices at 102% of ARA;
--Upward trend for Naphtha Prices following Fitch's oil price deck for WTI of USD60 in 2016 and USD70 in the long term;
--Narrowing PE spreads giving naphta price increases, while PP margins in U.S. remaining solid until mid-2017;
--No relevant dividends received from Mexico Project until 2018;
--Dividends payouts of 25% net income.
RATING SENSITIVITIES
Positive rating actions are unlikely in the medium term as Braskem remains a relatively high cost producer based on naphta and highly exposed to the industries prices volatilities. The tough macroeconomic scenario in Brazil is also a negative headwind for Braskem's business.
Future developments that may, individually or collectively, lead to a negative rating action include:
--New developments on Lava Jato operation;
--Material deviation resulting from the new naphta contract to be signed with Petrobras;
--A change in Braskem's management strategy regarding its adequate financial profile with robust liquidity position and long term debt schedule amortization;
--Net adjusted leverage above 2.5x on a sustainable basis.
LIQUIDITY
Braskem has a strong track record of maintaining a robust liquidity position. The company's management has adopted a conservative and pro-active financial strategy to limit the risks associated with its exposure to the cyclic and capital intensive nature of its business. The company has a strong cash position and a manageable debt amortization profile with BRL4.5 billion of cash and marketable securities as of June 30, 2015, not including Braskem Idesa. The company's liquidity position is further supported by USD750 million and BRL500 million of undrawn standby credit lines due 2019. These levels of liquidity compare with BRL2 billion of short-term debt. As of June 30, 2015, Braskem had BRL23.9 billion of total adjusted debt.
Fitch has affirmed the following ratings:
Braskem S.A.
--Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-';
--Long-term local currency IDR at 'BBB-';
--Long-term national rating at 'AA+(bra)';
--Unsecured senior notes due 2017 at 'BBB-'.
Braskem Finance Limited
--Unsecured senior notes due 2018, 2020, 2021, 2022 & 2024 at 'BBB-';
--Unsecured senior perpetual bonds at 'BBB-'.
Braskem America Finance Company
--Unsecured senior notes due 2041 at 'BBB-'.
The Rating Outlook for Braskem's corporate ratings is Stable.
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