Braskem Ratings Raised To 'BBB-' From 'BB+' On Stronger Business And Liquidity; Outlook Stable

1. March 30, 2011
Research Update:
Braskem Ratings Raised To 'BBB-'
From 'BB+' On Stronger Business
And Liquidity; Outlook Stable
Primary Credit Analyst:
Alexandre Menezes, Sao Paulo (55) 11-3039-9741;alexandre_menezes@standardandpoors.com
Secondary Contact:
Reginaldo Takara, Sao Paulo (55) 11 3039-9740;reginaldo_takara@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Related Criteria And Research
Ratings List
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2. Research Update:
Braskem Ratings Raised To 'BBB-' From 'BB+'
On Stronger Business And Liquidity; Outlook
Stable
Overview
• Braskem has integrated Quattor faster than we expected, which is allowing
it to improve credit metrics.
• We expect Braskem's improved business profile to allow it to report
higher and more resilient profitability.
• We are raising the global scale corporate credit rating on Braskem to
'BBB-' from 'BB+' and the Brazil national scale rating to 'brAAA' from
'brAA+'.
• The stable outlook reflects our expectation that Braskem will continue
deleveraging in 2011 while sustaining strong liquidity and further
capturing synergies from Quattor.
Rating Action
On March 30, 2011, Standard & Poor's Ratings Services raised its corporate
credit rating on Brazil-based petrochemical company Braskem S.A. to 'BBB-'
from 'BB+'. At the same time, we raised our Brazil national scale ratings on
Braskem to 'brAAA' from 'brAA+'. The outlook is stable.
Rationale
The upgrade reflects Braskem's improving cash flow metrics and liquidity, as
well as our expectations that the company will report higher and more
resilient credit metrics in the future because of its dominant market position
in Brazil, a diversified feedstock mix, favorable supply contracts, and
operating synergies with acquired Quattor. Braskem has delivered operating and
financial improvements ahead of our expectations because of its successful
integration of Quattor's assets. We believe these factors allow Braskem to
strengthen credit metrics and maintain an intermediate financial profile that
is compatible with the rating. Despite positive market fundamentals in the
intermediate term, Braskem remains exposed to industry cyclicality, the effect
of market and economic conditions on demand for petrochemical products, and
some margin fluctuation due to volatile raw material and product prices--even
more so with the currently volatile oil price environment.
We have also revised our analytical approach and will cease treating Braskem
as a government-related entity (GRE), given that we assess its importance and
role as limited and the Brazilian government doesn't directly own Braskem, but
owns it through Petroleo Brasileiro S.A. (Petrobras: BBB-/Stable/--). Still,
our analysis encompasses the relationship between Braskem and Petrobras, both
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3. Research Update: Braskem Ratings Raised To 'BBB-' From 'BB+' On Stronger Business And Liquidity; Outlook
Stable
commercial and as a shareholder, under our parent-subsidiary criteria.
Braskem's business profile is satisfactory. Although it competes with imports,
the company benefits from a dominant position in the Brazilian petrochemical
market as the sole local producer of polyethylenes and polypropylene in the
country and a leading player in polyvinyl chloride. Its favorable feedstock
contracts, close commercial relationships with its fragmented customer base,
and strong distribution capabilities allow Braskem to sell products at a good
profitability, a condition that further improved with the Quattor acquisition.
Braskem's ability to report sound and more stable margins is evidence of its
improved business position.
Additionally, as it is ramping up utilization rates at Quattor and capturing
synergies stemming from full integration of its assets, Braskem's
profitability is becoming more resilient. A more-balanced feedstock mix
(between naphtha, ethane, and refinery propylene), even more flexibility to
efficiently plan production at its several plants, economies of scope and
scale, and other operating synergies also bode well for Braskem's performance
in the intermediate term. Finally, we expect market conditions to remain
favorable in the next couple of years as we project demand to remain firm in
Brazil and global petrochemical prices should remain consistent with limited
supply expansion.
The financial profile is significant. We expect Braskem to sustain a more
prudent financial policy in the next years, with stronger liquidity and lower
leverage than historically. The company has improved credits metrics because
of stronger cash flows and by reducing on-balance-sheet debt in 2010, and our
analysis assumes further debt reduction in 2011 and beyond. Adjusted total
debt to EBITDA strengthened to 3.8x in December 2010 from 5.0x one year
earlier, but funds from operations (FFO) to total adjusted debt remained
somewhat weak at 13.5% in December 2010. We expect this ratio to improve to
25%-30% (which we view as more commensurate with the rating) from 2012 on as
we project Braskem to further expand cash flows in 2011 with favorable market
conditions and fully take advantage of synergies with Quattor.
Liquidity
Braskem's liquidity is strong. In December 2010, the company reported cash
reserves of Brazilian reais (R$) 2.6 billion compared with short-term debt of
R$1.7 billion. We project strong FFO for the next couple of years. In our base
case, we assume Braskem will finance capital expenditures and roll over some
bank debt but still reduce total debt with strong free operating cash flow
(FOCF). Capital expenditures are manageable, even if we included a joint
venture for a greenfield project finance in Mexico. We also project Braskem to
manage working capital efficiently, resulting in low financing needs in the
intermediate term. Braskem also counts on a stand-by credit facility of $350
million, which is fully available. Covenant headroom is adequate and based on
net debt ratios.
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4. Research Update: Braskem Ratings Raised To 'BBB-' From 'BB+' On Stronger Business And Liquidity; Outlook
Stable
Outlook
The stable outlook reflects our expectations that operating results will keep
improving as Braskem captures synergies out of acquired assets and favorable
market conditions allow for revenue and cash flow expansion. We project FFO to
total debt and debt to EBITDA to reach 20%-25% and 3.0x, respectively, by
year-end 2011 and 25%-30% and 2.5x, respectively, by 2012. We could lower the
ratings if Braskem's liquidity weakens or if it diverges from expected
financial improvement, with adjusted total debt to EBITDA above 3.0x and FFO
to adjusted total debt below 20%. Given that the ratings already factor credit
metric improvements, we believe a positive rating revision is unlikely in the
intermediate term but would be warranted if Braskem further improves its
financial profile, with FFO to total debt consistently above 40%.
Related Criteria And Research
• Rating Government-Related Entities: Methodology And Assumptions, Dec. 9,
2010
• Key Credit Factors: Business And Financial Risks In The Commodity And
Specialty Chemical Industry, Nov. 20, 2008
• 2008 Corporate Criteria: Analytical Methodology: April 15, 2008
Ratings List
Upgraded
To From
Braskem S.A.
Corporate Credit Rating
Global Scale BBB-/Stable/-- BB+/Stable/--
National Scale brAAA/Stable/-- brAA+/Stable/--
Senior Unsecured
Global Scale BBB- BB+
National Scale brAAA brAA+
Braskem Finance Ltd.
Senior Unsecured BBB- BB+
Braskem International Ltd.
Senior Unsecured BBB- BB+
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.
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