Scope Ratings (Scope) affirms a corporate credit rating of A for Germany-based chemicals company BASF SE (BASF) and its financing subsidiary BASF Finance Europe N.V.. Senior unsecured debt issued by either BASF SE or BASF Finance Europe N.V. is rated A. The short-term rating is S-1. The rating Outlooks are Stable.

The corporate credit rating of A assigned to BASF primarily reflects Scope’s view of the group’s strong position in the global chemical market, its high degree of diversification into different end markets, notably in the speciality chemical segment, as well as Scope’s expectation that free cash flow generation and the management’s commitment to a conservative financial policy will continue. Scope considers BASF’s business risk profile to be better than its financial risk profile.

Business risk profile

BASF’s business risk profile is supported by: i) BASF’s large share of business in different speciality chemical end markets, representing more than half of operating income (EBIT); ii) its broad geographical reach; iii) high customer diversification; iv) strong market positions; and v) cost advantages in its upstream chemicals business resulting from the integrated ‘Verbund’ strategy. The business risk profile is also enhanced by diversification benefits from the economically resilient agricultural chemicals division. Over the past decade, BASF has made a number of acquisitions in speciality chemicals and divested commodity chemicals assets. This portfolio shift has improved the company’s share of customised products and functionalised materials, eventually leading to greater protection against cyclicality risks and an improved share of business generated in emerging markets.

The business risk profile is however constrained by: i) BASF’s dependence on highly cyclical end markets such as the automotive, construction and electronics markets; ii) the strong correlation between global chemical markets and GDP and industrial production; and iii) risks related to volatile feedstock and energy prices. In view of the shift of global chemical consumption towards Asia, Scope views BASF’s strong presence in the rather stagnant European market as a constraint. The company’s oil and gas business is subject to earnings and cash flow volatility due to changes in the price of oil and natural gas.

Financial risk profile

Scope’s assessment of BASF’s financial risk profile reflects the management’s stated financial policy and credible track record of maintaining moderate leverage. Credit ratios such as Scope-adjusted debt (SaD)/EBITDA have been maintained below 2.0x over the past six years, with the exception of 2016 when SaD/EBITDA was 2.0x due to the conclusion of the Chemetall transaction.

Results for 2016 have been in line with Scope’s previous estimates. BASF reported positive first-half results for 2017, leading Scope to undertake a slight upward revision of its forecast for 2017. SaD/EBITDA for 2017 is expected to be significantly below 2.0x, at levels of about 1.5x, while funds from operations (FFO)/SaD should be close to 50%. Free cash flow (as reported by BASF) was EUR 2.2bn in H1 2017, supporting Scope’s belief that free cash flow for the full year should substantially exceed dividend payments, eventually leading to a slight improvement in credit metrics in 2017. Scope’s base case includes EUR 500m of bolt-on acquisitions in both 2017 and 2018, and the possibility that BASF continues to realign its portfolio is not ruled out. Scope does not, however, believe that any such acquisition will eventually prove to be significantly larger than the Chemetall acquisition (USD 3.2bn). The rating and outlook would accommodate a purchase of this magnitude. Scope now has a more positive view of free cash flow development which suggests further mild deleveraging in 2018.

Outlook

The Outlook is Stable and incorporates Scope’s expectation that BASF should achieve debt protection measures such as SaD/EBITDA of about 2.0x and FFO/SaD of 40% in the medium term. A positive rating action would be warranted if BASF were to significantly increase its share in the speciality chemicals business, thus considerably improving its business risk profile. Scope considers this scenario unlikely in the medium term given the company’s stated acquisition policy and financial targets. For 2018, Scope’s forecast suggests increasing room to manoeuvre within the current rating but insufficient to justify a change in outlook, notably because Scope believes that BASF will use some of its financial headroom to complete larger bolt-on acquisitions.

A rating upgrade may also be considered if BASF were to improve its debt protection measures (SaD/EBITDA, FFO/SaD) sustainably to levels of about 1.5x and 50% respectively. A negative rating action could result if the company’s financial risk profile were to weaken to levels of roughly 2.5x (SaD/EBITDA) and 30% (FFO/SaD).

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Legal and 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, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.
The rating analysis was prepared by Werner Stäblein, Lead Analyst
Responsible for approving the rating: Olaf Tölke, Committee Chair

Rating history
Date | Rating Action | Rating
BASF SE : 6 September 2016 | New | A/Stable/S-1
BASF Finance Europe N.V.: 23 December 2016 | New | A/Stable/S-1
Senior unsecured debt: 6 September 2016 | New | A

The rating outlook indicates the most likely direction in which the rating would move if it 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. The issuer participated in the rating process.
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; data provided by external data providers; current performance record; external market reports; audited 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.

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.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology, Jan. 2017) 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.

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