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

Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB+/Stable corporate issuer rating on German LANXESS AG. The S-2 short-term rating, BBB+ senior unsecured debt rating and BBB- subordinated (hybrid) debt rating have also been affirmed.

Rating rationale

The affirmed issuer rating continues to reflect the business risk and financial risk profiles, each assessed at BBB+. Market position and diversification are the main supports for LANXESS’ competitive position. The company continues to be a top player in numerous medium-sized and niche specialty chemicals markets, which are often characterised by high concentration, a few dominant players and limited competition. Diversification by end-market and country have also improved in the last years. The end-market mix is now less concentrated and less exposed to highly cyclical end-markets, which is in the context of a more resilient company set-up. In this regard, Scope acknowledges the acquisition of Emerald Kalama Chemical (Emerald) (see: LANXESS: Acquisition of Emerald Kalama Chemical). This acquisition is the blueprint for future M&A based on Scope’s understanding of LANXESS’ corporate development strategy. Scope foresees acquisitions of companies that benefit from regulatory protection to strengthen the Consumer Protection business. The tendency of such businesses to have considerable pricing power would support LANXESS’ competitive position which remains hampered by weak profitability. On the positive side profitability have been improving following the measures to clean-up the portfolio. However, weak profitability cascades into comparably weak free operating cash flow compared to European chemicals peers.

Following the Emerald acquisition for an enterprise value of USD 1,075m, Scope expects key credit ratios to temporally weaken in 2021 but remain in line with a BBB+ rated financial risk profile. As a key credit ratio, Scope-adjusted debt (SaD)/EBITDA, is likely to revert to 1.9x in 2022. LANXESS remains committed to maintaining an investment grade credit rating in the BBB rating category. As such, utilising opportunities for growth is likely pursued without threatening the credit profile. The assessment of the financial risk profile is hampered by weak free operating cash flow resulting in weak cash flow cover (FOCF/SaD).

Financial policy remains the most important supplementary rating driver. Although Scope has not modified LANXESS’ stand-alone rating, Scope’s positive view on its commitment to a conservative financial policy is already incorporated in the financial risk profile assessment.

Outlook and rating-change drivers

The Outlook for the issuer rating remains Stable. This mirrors Scope’s view of a SaD/EBITDA of around 2.0x in the foreseeable future, which goes hand in hand with the assumption of ongoing growth in profitability.

A positive rating action may be triggered if SaD/EBITDA is sustained below 1.5x. This could be achieved via a continued improvement in the EBITDA margin through, for example, higher price-setting power.

The rating could come pressure if SaD/EBITDA increased above 2.5x on a sustained basis, triggered, for instance, by an aggressive financial policy.

Long-term and short-term debt ratings

Scope has affirmed LANXESS’ short-term rating at S-2. This is grounded on its affirmed issuer rating, the ‘better than adequate’ internally and externally provided liquidity coverage as well as its banking relationships and standing in capital markets.

All senior unsecured debt has been affirmed at BBB+, the level of the issuer.

Scope has affirmed the subordinated (hybrid) debt category at BBB-. At present, one hybrid bond is outstanding (ISIN: XS1405763019, EUR 500m). The two notches below the issuer rating reflect the key structural elements of the outstanding hybrid debt: convertibility, replacement, coupon deferral, accumulation of payments, contractual subordination and the remaining maturity. 

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

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: Chemical Corporates, 23 April 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Olaf Tölke, Managing Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 January 2018. The Credit Ratings/Outlook were last updated on 8 September 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.