Scope Ratings has today upgraded its corporate issuer rating on German-based LANXESS AG to BBB+. Scope also affirms its S-2 short-term rating. Senior unsecured debt is upgraded to BBB+ and subordinated debt to BBB-. The Outlooks are Stable.

Due to an analytical error (“Scope assigns BBB rating to LANXESS, German specialty chemicals corporate; Outlooks Stable”), we incorrectly assigned a subordinated debt rating at BBB- in the rating action release of 30.01.2018. According to our corporate rating methodology, hybrid bonds are rated two notches below respective issuer rating. So, Scope’s initial rating of LANXESS subordinated debt was BB+. Today’s rating action corrects this error.

The corporate rating continues to benefit from LANXESS’s business risk profile, including a strong position in medium-sized markets, a generally broad product portfolio, and an end-market mix that has improved with the acquisitions made in recent years. Profitability in the last few years has also been negatively affected by the company’s organisational realignment, the integration of acquired companies and the volatility of feedstock prices, especially butadiene. In view of a reduced dependency on feedstock prices and lower one-off costs, Scope is of the opinion that company profitability is likely to remain at a relatively high level on a sustainable basis.

With regard to LANXESS’s financial risk profile, proceeds of about EUR 1.4bn from the sale of the ARLANXEO division will further boost the company’s credit metrics. The transaction is expected to be closed around year end 2018. Although regulatory approval is still pending, Scope expects that it will be granted by the relevant antitrust authorities. In conjunction with the positive effects of ongoing solid economic growth and significantly lower one-off costs, Scope expects strong delivery from 2018 going forward. As the agency believes LANXESS will maintain its conservative financial policy, balancing shareholder and debtholder interests, its rating case includes selective spending on reduction in interest-bearing debt as well as organic and external growth. Liquidity will remain 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 maintaining its investment grade rating. Scope does not expect these factors to change in the foreseeable future.

The Stable Outlook reflects Scope’s expectation of ongoing solid growth in the company’s revenue and EBITDA, mainly based on the favourable economic environment as well as closing of the ARLANXEO transaction around year end 2018. A higher rating may be triggered if the company can improve its business risk profile, raising its EBITDA margin above 19% combined with a SaD/EBITDA of less than 1.5x, on a sustained basis. A negative rating action could result from the initiation of large, debt-funded M&A; or a sustainable increase in SaD/EBITDA to above 2.5x.

Stress Testing
No stress testing was performed.

Cash Flow Analysis
Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating(s) and/or rating outlook(s): Rating Methodology: Corporate Ratings, 15. January 2018 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 rating was requested by the rated entity or its agents. The rated entity did participate in the rating process.
The following substantially material sources of information were used to prepare the credit rating: issuer, third parties, public domain, and Scope internal sources.

Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, 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 GmbH.
Lead analyst Olaf Tölke, Managing Director
Person responsible for approval of the rating: Sebastian Zank, 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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