On 12 September 2017, Scope affirmed the corporate credit rating of A for Germany-based chemicals company BASF SE 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 Outlooks are Stable.

Following Scope’s affirmation of the BASF ratings, the group announced two acquisitions: the polyamide/nylon business of Solvay, and significant parts of Bayer’s seed and herbicide business.

Both acquisitions, as well as the expansion of the specialty chemicals business, are in line with Scope’s earlier expectation that BASF will continue to realign its portfolio as it has over the past decade and will use financial headroom under the rating to complete larger bolt-on acquisitions. Both deals are also in line with BASF’s public strategy of balancing its portfolio at around 50% specialty chemicals and solutions and 50% differentiated commodities. Although the deals add business in the economically more resilient specialty chemicals business, Scope has left its business risk assessment unchanged.

Scope believes the acquisitions are in line with BASF’s longstanding acquisition criteria and business and financial strategy. While the Bayer deal is a larger bolt-on acquisition than originally considered in Scope’s analysis of acquisition risks, the announced purchase price (EUR 5.9bn) and increase in financial debt is still consistent with the current ratings.

The Bayer acquisition complements BASF’s Agricultural Solutions segment, adding patented products and expertise, notably in terms of seeds for canola, rape, soybean and cotton (key crops for growing regions such as the US). The acquired assets are highly cash-generative with substantial operating margins (>25% EBITDA margin) and involve limited capital expenditures. The deal’s completion is still subject to the Bayer/Monsanto transaction being finalised (expected for early 2018) as well as regulatory approvals.

The Solvay deal (consideration of EUR 1.6bn) supports BASF’s backward integration into the polyamide value chain and complements the group’s product portfolio in this field. This deal is expected to be closed in Q3 2018.

Scope’s financial forecast for 2018F now includes the purchase price for the Bayer assets (EUR 5.9bn) and the polyamide unit (EUR 1.6bn). Scope also assumes that both transactions will be closed as guided and has included both a pro-rata effect on revenues and EBITDA in Scope’s forecast for 2018F. Overall, Scope believes both acquisitions will contribute about EUR 400m-450m of earnings (EBITDA) in 2018F and about EUR 600m in 2019F. The analysis did not include revenue synergies (notably in Agricultural Solutions). Integration risks for both assets, notably regarding the Bayer deal, appear manageable and low in Scope’s view.

BASF’s leverage will change only moderately from Scope’s standpoint, keeping in mind that the perceived deterioration of leverage metrics in 2018F effectively reflects the pro-rata consolidation of earnings and cashflows of the acquired assets. Scope also considers the intended acquisitions as being in line with the management’s stated financial policy and credible track record of maintaining a 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 Chemetall transaction. Going forward, and including acquisition effects, Scope expects leverage to continue to be below 2.0x.

In line with Scope’s more positive view on free cash flow in 2017F and 2018F, it is likely that incremental debt incurred for both acquisitions will be reduced in 2018E and beyond. Free cash flow (as defined and reported by BASF) was EUR 2.2bn in H1 2017.

For 2017F Scope expects free cash flow (as defined by BASF) of around EUR 4.8bn, followed by EUR 5.0bn in 2018F, slightly more than previously estimated. In Scope’s view, dividend payments will be EUR 2.8bn-3.0bn in each of these two years, i.e. considerably below the forecasted free cash flow.

As announced by BASF, the Bayer transaction will be funded by a combination of bonds, cash, and possibly draw-downs under the commercial paper programme. Scope continues to view BASF’s liquidity and financial flexibility as strong. In view of BASF’s solid standing in public-debt markets,

Scope expects the long-term funding of the Bayer transaction via new bonds to be manageable.

This publication does not constitute a credit rating action. For the official credit rating action release click here.

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