Rating action

Scope Ratings has today affirmed the A corporate issuer ratings on German-based BASF SE and its financing subsidiary BASF Finance Europe N.V. The S-1 short-term rating and A senior unsecured debt rating were also affirmed. The Outlook is Stable.

Rating rationale

The credit rating assessment of ‘A’ still mirrors BASF’s position as the largest player in the global chemicals industry (2018 sales: EUR 62.7bn). Moreover, the company is ranked among the top three in the market for about 75% of its businesses and has a favourable cost position driven by its ‘Verbund’ concept and sizeable production capabilities. In the context of BASF’s large exposure to specialty chemicals, its considerable intellectual property portfolio and R&D activity are credit-positive. Among others, the company’s diversification is supported by a strong global footprint, serving up to 90,000 customers across more than 90 countries. In this regard, Scope highlights BASF’s strongly diversified product portfolio along the chemical value chain, which includes a considerable amount of specialty chemicals, which are less cyclical than base chemicals and have low substitution risk. By bundling its Oil & Gas business in a joint venture with LetterOne DEA (closed on 1 May 2019; BASF holds 67% and LetterOne 33% of Wintershall DEA’s ordinary shares), BASF has reduced volatility risks for profitability (EBITDA margin), as the segment is subject to earnings and cash flow volatility due to price changes in oil and natural gas. Additionally, BASF’s substantial specialty chemicals activities have enhanced the resilience of profitability, as most of these divisions depend less on raw materials, can exert more pricing power and benefit from product innovations.

BASF’s financial risk profile still reflects management’s stated financial policy and credible track record of maintaining moderate leverage. This is despite BASF’s credit metrics having deteriorated in 2018, due to 1) the Wintershall deconsolidation and its resulting accounting treatment as discontinued operations from 1 January 2018; 2) weaker demand from the automotive industry, combined with significantly lower isocyanate (e.g. TDI/MDI) prices; and 3) the limited negative cost impacts from the low water levels in the Rhine.

As the global economy is still losing steam, Scope anticipates key credit ratios to further deteriorate in 2019, but remain in line with the agency’s ratio guideline for a financial risk profile rated ‘A’. According to Scope’s rating case, leverage, as measured by Scope-adjusted debt (SaD)/EBITDA, is projected to deteriorate to 2.7x in 2019, from 2.3x in 2018. While conditions in the global chemicals industry are likely to remain challenging beyond 2019, Scope assumes stronger credit metrics beyond 2019, due to 1) the first positive effects on profitability from the ‘excellence program 2019–2021’; 2) increasing financial results of the equity-consolidated Wintershall DEA joint venture; and 3) no significant shut-downs of major production facilities for maintenance, among others.

Rating-change drivers

The Outlook is Stable and mirrors BASF’s solid financial risk profile assessment, supported by better-than-adequate liquidity, in accordance with Scope’s rating methodology, and a commitment to a solid ‘A’ rating. In light of this, Scope expects, for the medium term, debt protection measures of SaD/EBITDA at about 2.0x and funds from operations (FFO)/SaD at 40%. A positive rating action would be warranted if BASF were to significantly increase its share in the specialty chemicals business and thus considerably improve its business risk profile. Scope considers this scenario unlikely in the medium term given the company’s stated acquisition policy and financial targets.

A rating upgrade may also be considered if BASF were to improve its debt protection measures (SaD/EBITDA, FFO/SaD) sustainably to about 1.5x and 50%, respectively. A negative rating action could result if the financial risk profile were to weaken, i.e. with a SaD/EBITDA of sustainably more than 2.5x and an FFO/SaD of 30%.

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

Stress testing
No stress testing was performed.

Methodology
The methodology used for this rating and rating outlook (Corporate Methodology, Chemical Corporates) is 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 participate in the rating process. Scope had access to accounts, management and other relevant internal documents for the rated entity or related third party.
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: Werner Stäblein, Executive Director
Person responsible for approval of the rating: Henrik Blymke, Managing Director
The ratings/outlooks were first released by Scope on 06 September 2016. The ratings/outlooks were last updated on 12 September 2017.

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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