On September 27, 2018 BASF and LetterOne signed an agreement to merge its Oil & Gas segment with DEA. The formation of the joint venture and completion of the transaction is subject to customary regulatory approvals and closing is expected in first half 2019. Scope assess the risk that no regulatory approval will be granted as low. Following the closing of the transaction, BASF expects to account for its stake in the Wintershall DEA joint venture under the at-equity method.

On September 12, 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.

BASF’s corporate credit rating of A primarily reflects Scope’s view of the company’s strong position in the global chemical market, its high degree of diversification in broad geographical markets and its operations along the chemical value chain. BASF’s clear focus on a wide-ranging portfolio of specialty chemicals, which are less cyclical than base chemicals as well as having low substitution risk, is of particular importance. The rating is also underpinned by Scope’s expectation that solid free cash flow generation and the management’s commitment to a conservative financial policy will continue.

Business risk profile

Scope considers BASF’s business risk profile to be better than its financial risk profile. The company’s business risk profile is supported by: i) BASF’s large share of business in different specialty chemical end markets, representing approximately half of operating income (EBIT); ii) its global geographical reach; iii) high customer diversification; iv) strong market position (BASF is ranked among the top three in about 70% of its business); and v) cost advantages in its base chemicals business resulting from the integrated ‘Verbund’ strategy. Over the past decade, BASF has made a number of acquisitions in specialty chemicals, divested its base chemical assets and signalled its exit from the Oil & Gas business. The company has consolidated the market position of its Agricultural Solutions segment through the acquisition of Bayer’s seed treatments and research on wheat hybrids, herbicides, digital farming and the vegetable seeds business. Furthermore, BASF has strengthened its position in the growing engineering plastics market through the purchase of Solvay’s polyamide business, ranked third globally. The entity will be consolidated in BASF’s Functional Materials and Solutions division. The Closing of this transaction is expected in H1 2019, as the European Commission has set a deadline of December 18, 2018 to decide whether to approve the proposed purchase.

Acquisitions have 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. BASF’s business risk profile is constrained by: i) its dependence on highly cyclical end markets such as the automotive, construction and electronics markets; ii) the close correlation between global chemical markets, GDP and industrial production; and iii) risks related to volatile feedstock and energy prices in its Chemicals divisions. Scope views the expected deconsolidation of BASF’s Oil & Gas segment as positive from a rating point of view though the positive effects do not change or business risk assessment. We see positive effects from a lowered sensitivity to volatile oil prices and reduced risks for operations in politically risky countries. 

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 kept 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. For the current year, Scope expects a deterioration in SaD/EBITDA to 1.6x from 1.3x in 2017. These metrics are still, however, in line with our medium-term rating case. Scope anticipates stronger credit metrics for 2019 going forward, driven by full-year consolidation of acquisitions completed in 2018 combined with ongoing global economic growth.

On September 27, 2018 BASF and LetterOne signed an agreement to merge its Oil & Gas segment with DEA. The formation of the joint venture and completion of the transaction is subject to customary regulatory approvals and closing is expected in first half 2019. BASF will switch to at-equity treatment of its currently consolidated Oil & Gas segment, expected from July 01, 2019 going forward. Our rating case for 2018 and subsequent years include the respective effects of the transaction, based on estimates by Scope. In contrast to BASF financial reporting, our rating case includes no treatment as discontinued operation of Wintershall until closing of the transaction. Credit metrics are supported by the expected reduction of debt, pension obligations, operating lease liabilities, which is partly offset by lower level of earnings and cashflow through the deconsolidation of Wintershall.

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 funds from operations/SaD of 40% in the medium term. A positive rating action would be warranted if BASF were to significantly increase its share in the specialty 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 for bolt-on acquisitions.

A rating upgrade may also be considered if BASF were to sustainably improve its debt protection measures (SaD/EBITDA, funds from operations/SaD) 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% (funds from operations/SaD).

This publication does not constitute a credit rating action.

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