Scope Ratings today assigns a first-time corporate issuer rating of BBB to German-based LANXESS AG. Scope also assigns an S-2 short-term rating. Senior unsecured debt is rated BBB and subordinated debt at BBB-. Outlooks are Stable.

The corporate rating benefits from LANXESS’s business risk profile, including a strong position in medium-sized markets, overall broad product portfolio, and end-market mix that improved with the Chemtura and Chemours acquisitions. However, LANXESS is exposed strongly to the automobile sector at consolidated level, and Scope believes a greater share of less cyclical end-markets, such as pharmaceuticals or consumer products, would benefit profitability during economic downturns. Profitability in the last few years has also been affected negatively by the company’s organisational realignment, restructuring, and integration of acquired companies.

In terms of the financial risk profile, the company has benefited from ongoing improvements in demand and pricing for most of LANXESS’s specialty chemicals products, as well as significantly lower one-off costs than in previous years. Scope expects free cash flow, currently low compared with its sector’s levels, to recover significantly, which will result in a speedy deleveraging in 2018 and 2019. Liquidity is also more than sufficient, in Scope’s view, backed by undrawn credit lines, and good access to bank debt and debt capital markets. Other positive aspects include the company’s strong commitment to maintain the investment grade rating, as well as a balanced approach towards shareholders and debtholders; Scope does not expect these aspects to change in the foreseeable future.

The Stable Outlook reflects Scope’s expectation of ongoing growth in the company’s revenue and EBITDA, based on positive acquisition-related effects and a solid economic environment. In 2018, Scope expects improvements for Scope-adjusted debt (SaD)/EBITDA to around 1.7x and free operating cash flow/SaD to about 23%. These levels accord with Scope’s rating outlook and a BBB financial risk profile. A higher rating may be triggered if the company can maintain the EBITDA margin above 15% combined with a SaD/EBITDA of less than 1.5x and an FFO/SaD of above 50%.

Scope currently views the probability of a positive rating action as remote. A negative rating action could result from worsened trading conditions, such as increased feedstock prices, that lead to a single-digit EBITDA margin; or from the initiation of large, debt-funded M&A. An increase of SaD/EBITDA to above 3.0x or a decrease in FFO/SaD to below 30%, both on a sustained basis, may also prompt downgrades.

The full rating report, including rating rationale and analytical details is available at www.scoperatings.com or HERE.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this rating(s) and/or rating outlook(s) Corporate Rating Methodology 2017 is available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to 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 definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com. The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings AG.
Lead analyst Olaf Tölke, Managing Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 30.01.2018.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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