Rating rationale

Scope Ratings today assigns BASF SE an A Corporate Issuer Credit Rating and an S-1 short-term rating. The senior unsecured debt issued by the group has been rated at A. All ratings have a Stable Outlook. The first-time ratings reflect Scope’s view of i) the group’s strong position in the global chemical market, ii) its high degree of diversification in different end-markets, notably in the specialty chemical segment, and iii) Scope’s expectation for a continuation of free cash flow generation and the management’s commitment to a conservative financial policy.

In Scope’s view, the business risk profile of BASF is better than its financial risk profile. The business risk profile is supported by BASF’s high share of business in different specialty chemical end-markets, representing more than half of operating income (EBIT); broad geographical reach; high customer diversification; strong market positions; and cost advantages in its upstream chemicals business resulting from the integrated ‘Verbund’ strategy. The business risk profile is also supported by diversification benefits from the economically resilient agricultural chemicals division. Over the past decade, BASF made a number of acquisitions in specialty chemicals and divested commodity chemicals assets. The portfolio shift has improved the share of customised products and functionalised materials, eventually leading to a better resilience of the group against cyclicality risks and an improved share of business generated in emerging markets. The business risk profile is constrained by the dependence on very cyclical end-markets such as automotive, construction, and electronics; the strong correlation of global chemical markets with GDP and industrial production; and risks of volatile feedstock and energy prices. In view of the shift of global chemical consumption towards Asia, Scope considers BASF’s currently high presence in the rather stagnant European market as a constraint. The oil and gas business is subject to earnings and cash flow volatility due to changes in oil price.

Scope’s assessment of the financial risk profile reflects its perception of the management’s stated financial policy and credible track record of maintaining a moderate leverage, as evidenced, for instance, by credit ratios such as a Scope-adjusted debt (SaD)/EBITDA of significantly below 2.0x over the past five years.

For 2016, Scope expects the key debt protection measures, SaD/EBITDA and funds from operations (FFO)/SaD, to be respectively slightly lower than 40% and about 2.0x. Credit ratios in 2016 are slightly weaker than those in preceding years. This results from the expected closing of the Chemetall transaction at year-end 2016 with the full effect on SaD but the full consolidation of the target’s cash flows and operating profit only from the closing of the transaction. Scope’s forecast for 2017 includes the full effect of the Chemetall transaction and points to an improvement of credit metrics to slightly above 40% (FFO/SaD) and slightly below 2.0x (SaD/EBITDA). In view of the projected free cash flow generation and expected dividend payments, Scope sees only minimal potential for further significant deleveraging. 

Key rating drivers

Positive

• Strong market position, holding between first and third position for about 70% of its business
• High share of specialty chemicals that are less subject to cyclicality risks and changing feedstock prices 
• Broad and globally diversified business; one of the largest integrated chemical companies globally; diversification benefits from presence in agrochemicals, bulk and specialty chemicals
• History of resilient and solid free cash flow generation, high financial flexibility and proven management commitment to ratings
• Substantial coverage of future pension payments with accumulated pension plan assets covering payments well over a decade

Negative

• High dependence on general economic environment and in particular on economic development in emerging markets
• Risks of sudden negative changes in feedstock prices and exposure to changes in global commodities and food prices
• Exposure to very cyclical end-markets, such as transportation (automotive) and construction, in the functional materials and solutions division

Outlook

The Outlook is Stable and incorporates Scope’s expectation that BASF should achieve debt protection measures such as a SaD/EBITDA of about 2.0x and a FFO/SaD of 40% in the medium term. In view of the expected closing of the Chemetall transaction at year-end 2016, both credit metrics are likely to be lower than these levels on a reported basis given that the target’s cash flows and operating profit will only be consolidated from the closing of the transaction.

A positive rating action would be warranted if BASF were to significantly increase its share in the specialty chemicals business – a scenario that Scope’s consider unlikely to materialise in the medium term given the group’s stated acquisition policy and financial targets. A rating upgrade could also occur if BASF were to improve its debt protection measures (SaD/EBITDA, FFO/SaD) to levels of respectively about 1.5x and 50%. In view of Scope’s base case – expected free cash flow is largely used for dividend payments – the agency does not envisage any such improvement and deleveraging to materialise over the two-year outlook horizon. A negative rating action could occur if the financial risk profile were to weaken to levels of about 2.5x (SaD/EBITDA) and 30% (FFO/SaD).

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Regulatory disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Torsten Hinrichs, Dr Stefan Bund, Dr Sven Janssen.
Rating prepared by Werner Stäblein, Lead Analyst.
Rating committee responsible for approval of the rating: Dr Stefan Bund, Committee Chair.
The rating concerns an entity, which was evaluated for the first time by Scope Ratings AG.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
-Website of the rated entity
-Detailed information provided on request
-Valuation reports, other opinions
-Data provided by external data providers
-Current performance record
-External market reports
-Unaudited annual financial statements
-Press reports/other public information

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

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Rating issued by
Scope Ratings AG, Lennéstraße 5, 10785 Berlin.