Rating action

Scope Ratings has today affirmed its BBB+ corporate issuer ratings on German-based LANXESS AG. The Outlook is Stable. Scope Ratings also affirms the S-2 short-term rating, the BBB+ senior unsecured debt rating, and the BBB- subordinated debt rating.

Rating rationale

The rating still reflects LANXESS’ strong position across various medium-sized and niche specialty chemicals markets, which are often concentrated, dominated by few players, and less competitive than commodity chemicals markets. Following the portfolio clean-up in the last couple of years, we view LANXESS’s diversification to be more resilient and less concentrated in terms of sales by end-markets. However, LANXESS’ credit rating is hampered by weak profitability. Despite EBITDA margin of the “New LANXESS” having increased in 2018 (13.0%) and Q1 2019 (13.9%) the company’s profitability is still regarded non-investment grade in accordance with Scope’s Rating Methodology for Chemical Corporates. In summary, this is reflected in a business risk profile rated at ’BBB+’.

In 2018, LANXESS key credit ratios were considerably strong due to the disposal of the remaining 50% stake in ARLANXEO to Saudi Aramco (see: Scope upgrades rating of German specialty chemicals corporate LANXESS to BBB+; Outlook Stable) and the positive outcomes of the realignment over previous years. For 2019 and 2020, we expect credit metrics to deteriorate slightly but remain firmly in line with a ‘BBB+’ financial risk profile, supported by our opinion of better-than-adequate liquidity. The anticipated development of financial ratios is due to by missing ARLANXEO contribution and substantial capex of the organic growth programme. Regarding the improved end-market mix, we consider the financial risk profile to be less sensitive to more challenging economic conditions. Furthermore, the company has maintained its conservative financial policy, continuing to balance shareholder and debtholder interests and committed to maintaining an investment-grade rating in the ‘BBB’ range.

The short-term rating of S-2 is backed by the solid liquidity situation and long-term issuer credit rating.₁

Rating-change drivers

The Stable Outlook still incorporates LANXESS’ conservative financial policy, and our expectation in the coming years for stronger key credit ratios and free cash flow relative to pre-2017 levels (in 2018, LANXESS key credit ratios were strong due to the disposal of the remaining 50% stake in ARLANXEO to Saudi Aramco). With a less volatile EBITDA margin thanks to improved end-market diversification, we expect Scope-adjusted debt (SaD)/EBITDA to move towards 2.0x and FFO/SaD to 40% in 2020. A higher rating may be triggered if SaD/EBITDA reduced and remained below 1.5x. A negative rating action could be warranted if large, debt-funded M&A was initiated; or SaD/EBITDA increased to above 2.5x on a sustained basis.

_{¹ Editor's note: This sentence was amended on 25 July 2019 to correct an editorial error. The original sentence was: "The short-term rating of S-2 is backed by LANXESS’s on the solid liquidity situation and long-term issuer credit rating".}

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

Methodology
The methodologies used for this ratings and rating outlook (Corporate Rating Methodology, Rating Methodology: Chemical Corporates) are available on www.scoperatings.com.
Historical default rates of the entities rated by 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 agent 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.
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: Thomas Faeh, Executive Director
The ratings/outlooks were first released by Scope 30 January 2018. The ratings/outlooks were last updated on 15 August 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
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.

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