On 26 February 2019, BASF Group published its financial results for FY 2018. As a consequence of more challenging conditions for its Chemicals segment and the long period of low water levels at the Rhine River, which resulted in higher costs (see press release: BASF Group lowers its guidance for the fiscal year 2018), EBITDA shrunk considerably to about EUR 9,166m (2017: EUR 10,765m). The decline in operating profits (EBITDA) was particularly pronounced in Q4 2018 with a reported decline in EBITDA of about 55% in the Chemicals segment. Earnings were likewise negatively affected by weaker contributions from divisions Performance Products, Functional Material & Solutions, and Agricultural Solutions. Following the closing of the transaction to acquire businesses from Bayer in August 2018, BASF’s Agricultural Solutions business suffered from seasonality effects and integration costs, as most of the target’s earnings are generated in the first half of the year.

BASF has reported the transfer of its Wintershall assets into the newly created joint venture with DEA as discontinued operations. Scope’s previous forecast has not included the deconsolidation effect for 2018. The impact on credit metrics was somewhat negative in 2018 but remains in line with Scope’s rating case. Based on figures reported by BASF the key credit ratios in 2018 were:

• Scope-adjusted funds from operations (FFO) to Scope-adjusted debt (SaD) of 35% (62% in 2017) against Scope’s previous forecast from December 2018 for the 2018 year of 35%;
• SaD to Scope-adjusted EBITDA of 2.3x (1.3x in 2017) versus Scope’s previous forecast from December 2018, when 1.9x was expected;
• Free operating cash flow (FOCF) to SaD of 21% (38% in 2017) compared to the expected figure of 24% as of Scope’s last update from December 2018.

2019 looks to be a better year for BASF Group

According to the company guidance, sales and earnings are expected to be slightly higher than in 2018. This suggests a low single-digit increase in revenues while operating profit (EBIT) before special items (as defined and communicated by BASF) should expand to the lower of end of BASF’s operating profit guidance. In Scope’s view, this guidance is reasonable and the agency has incorporated a similar development in its base case for 2019. BASF’s Agricultural Solutions business should benefit from a full-year contribution of the acquired businesses from Bayer. In contrast, the Materials business is expected to continue to suffer from weaker prices for isocyanates (TDI/MDI). In H1 2019, Scope expects the closing of the merger between Wintershall and DEA (see monitoring note: BASF: Updated rating case after signing of Wintershall transaction), which will significantly reduce BASF’s dependency on the highly cyclical oil and natural gas exploration and production business.

Rating implications

Scope believes that 2019 is likely to result in stronger credit metrics, assuming an improvement in economic conditions. A key support for improved credit metrics in 2019 is the Wintershall/DEA merger. Following the expected closure of the deal, Scope expects the newly created Wintershall/DEA joint venture to settle intra-group loans handed out by BASF. This should lead to a significant inflow of cash for BASF. Scope anticipates BASF Group will stick to its conservative financial policy, including selective M&A. As a result, Scope’s ratio guidelines (FFO/SaD >30%, SaD/EBITDA <2.5x) are likely to be met in 2019. At this point, Scope’s base case for 2019 suggests key credit ratios of 40% (FFO/SaD) and 2.0x (SaD/EBITDA).

This publication does not constitute a credit rating action. For the official credit rating action release click here. On 12 September 2017, Scope assigned BASF SE an issuer rating of A. The short-term rating is S-1. The Outlook is Stable.