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

Rating action

Scope Ratings GmbH (Scope) has assigned an issuer rating of BBB/Stable to Norway-based Elkem ASA. Scope has also assigned a senior unsecured debt rating of BBB and a short-term rating of S-2.

Rating rationale

Elkem’s business risk profile reflects its moderate market position as the fifth largest manufacturer of silicones worldwide and the third largest manufacturer of silicon metal (excluding China and Chinese-based producers). That said, Elkem dominates smaller or niche markets such as electrode paste. Scope Ratings believe Elkem will maintain its strong cost position in the global silicone industry, which is protected by high entry barriers. The company’s diversification benefits from a solid footprint with 29 production plants around the globe, and the widespread and diverse application of silicones. Still, diversification is hampered by the moderate contribution of speciality chemicals products to sales, which makes Elkem vulnerable to price declines and limits its ability to exert real price setting power. The historical long-term average profitability (EBITDA) margin of below 15% is a slightly negative factor in relation to our methodology thresholds for profitability and efficiency and compared to key competitors. However, Scope see potential for the margin to stay above 15% in the next few years based on the high prices in the market in 2021 and the effects of the company’s recent investment and cost efficiency programmes.

Elkem’s financial risk profile has significantly improved in 2021, following the equity issue in April (NOK 1.9bn) and better operating profitability. As of September 2021, leverage (Scope-adjusted debt [SaD]/EBITDA) is around 1x. Scope Ratings expect Elkem to maintain its leverage ratio within the company’s financial policy range of 1-2x going forward despite increased investments.

In recent years, Elkem has been able to fund reinvestment capex through internally generated cash flow with acceptable margins. However, additional strategic growth investments led to negative cash generation in the last couple of years. Thus, the cash flow cover ratio is currently the weakest element in Elkem’s financial risk profile. Although the company could see positive free operating cash flow (FOCF) going forward as prices are high, discretionary cash flow (adjusted for strategic M&A and dividend expectation) is likely to be negative.

No rating adjustments have been made for the supplementary rating drivers of financial policy or parent support. Scope consider Elkem’s financial targets to be sound and are confident that management will strive to preserve the capital structure if market conditions weaken or expansionary investments are high. As regards parent support, Elkem is majority-owned by Bluestar, resulting in an indirect ownership by the Chinese government through the ChemChina/Sinochem holding companies. While Scope acknowledges the proven co-operation between Elkem and its direct parent, this factor does not lead to an explicit rating uplift.

Outlook and rating-change drivers

The Stable Outlook assumes unchanged financial targets by the company, which should result in prudent strategic growth ambitions and keep SaD/EBITDA in the 1-2x range in the medium term.

A positive rating action could be warranted if Elkem sees higher profitability and fewer strategic growth investments, generating positive and sustained free operating cash flow directed towards strengthening the balance sheet, exemplified by SaD/EBITDA below 1.0x on a sustained basis. Moreover (in the longer term), a positive action could also occur if the overall business risk factors improve by way of increased specialty chemical exposure or a general improved competitive position.

A negative rating action is possible if SaD/EBITDA reaches above 2.5x on a sustained basis, due to a more aggressive growth strategy or tougher market conditions.

Long-term and short-term debt ratings

The senior unsecured debt rating is in line with the issuer rating. Elkem ASA is also the bond-issuing entity. The S-2 short-term rating reflects the company’s sufficient short-term debt coverage and good access to banks and debt markets. 

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: Henrik Blymke, Managing Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 17 December 2021.

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.