The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings has today affirmed its BBB+/Stable corporate issuer rating to German-based LANXESS AG. The agency also affirmed the S-2 short-term rating, the BBB+ senior unsecured debt rating, and the BBB- subordinated debt rating.
The analysis is based on public information. The issuer has participated, i.e. access to internal documents, management and the rated entity.

Rating rationale

LANXESS still meets all the requirements for a business risk profile of ‘BBB+’. The company continues to hold leadership positions across numerous medium-sized and niche specialty chemicals markets, which are often concentrated, dominated by few players, and less competitive. Diversification remains supportive of the company’s business risk profile, as end-market diversity and global setup have improved in recent years. LANXESS’ set-up is now more resilient and less concentrated. On the negative side, the company’s business risk profile continues to be constrained by improved but still comparably weak profitability (EBITDA margin 2019: 13.4%). The positive trend in profitability is mainly attributable to the various measures taken to clean-up the portfolio. Moreover, profitability was bolstered by the resilient performance of company’s newly formed Consumer Protection division, which benefited of Covid-19 driven demand for disinfection products in H1 2020. Due to the relatively small size of divestments executed in 2019/2020, we left our assessment of LANXESS’s business risk profile unchanged.

The company’s financial risk profile is affirmed at ‘BBB+’. Although LANXESS has also been hit by the Covid-19 pandemic, Scope assumes that its credit profile will even improve in the current year. This is due to: i) proceeds of EUR 740m in April 2020 from the company’s sale of its 40% stake in Currenta (see: LANXESS: Disposal of 40% stake in Currenta will further support credit metrics), plus a profit participation of EUR 150m; and ii) numerous countermeasures including cost savings, capex reduction and the pausing of the company’s share buy-back scheme. Scope anticipates Scope-adjusted debt (SaD)/EBITDA of 1.9x and funds from operations (FFO)/SaD of 35% at year-end 2020, compared to the previous year’s leverage ratios of 2.3x and 30% respectively. Furthermore, liquidity continues to be ‘adequate’. In the current environment, it is positive that the next significant debt maturities are in October 2021 (EUR 500m), April 2022 (EUR 100m) and November 2022 (EUR 500m). LANXESS also has access to an undrawn revolving credit facility of EUR 1.0bn.

In the supplementary rating driver section the part on financial policy continues to be the most important for Scope’s assessment of LANXESS. The company continues to pursue a conservative financial policy in order to maintain a credit rating in the ‘BBB area’.

Outlook and rating-change drivers

The unchanged Stable Outlook incorporates our opinion of LANXESS’ conservative financial policy, coupled with some vulnerability due to the Covid-19 pandemic, and ample liquidity. Including a less volatile EBITDA margin thanks to improved end-market diversification and spending on M&A to further upgrade the portfolio, the agency expects SaD/EBITDA fluctuate around 2.0x over a medium-term horizon.
A higher rating may be triggered if SaD/EBITDA persistently falls below 1.5x. This could be achieved via a sustained improvement in the company’s EBITDA margin e.g. by the exertion of higher pricing setting power.
The rating could come under pressure if SaD/EBITDA increases to above 2.5x on a sustained basis. This could be triggered by an aggressive financial policy, for instance.

Long-term and short-term debt ratings

Senior unsecured debt category is affirmed at ‘BBB+’, as all senior unsecured debt is issued by LANXESS AG.
Subordinated debt category is affirmed at ‘BBB-‘. The two notches below the issuer rating reflect the key structural elements of the outstanding hybrid debt: convertibility, replacement, coupon deferral and cumulation of payments, contractual subordination and remaining maturity.
Scope has affirmed the S-2 short-term 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 rating(s) and/or rating outlook(s) (Corporate Rating Methodology, 26 February 2020; Rating Methodology Chemical Corporates, 23 April 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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 agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: issuer, 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 rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
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 on 30 January 2018. The ratings/outlooks were last updated on 23 July 2019.

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
© 2020 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. Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.