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      MONDAY, 27/06/2022 - Scope Ratings GmbH
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      Scope affirms BBB+/Stable issuer rating on LANXESS AG

      The rating continues to reflect the company’s strong position in medium-sized chemicals markets with considerable barriers to entry and a conservative financial policy.

      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 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 business risk profile continues to reflect a BBB+ quality, also accounting for the recently announced transaction with Advent International (see: LANXESS, Advent International team up to acquire DSM’s Engineering Materials division).

      On 30 May 2022, LANXESS said it will set up a joint venture with Advent International. The newly formed entity will acquire DSM’s Engineering Materials division for a purchase price of roughly EUR 3.7bn. The new JV is financing the purchase with equity from Advent and external debt. LANXESS will transfer its High Performance Materials business unit (segment: Engineering Materials) into the JV with Advent. The new entity will generate yearly sales and EBITDA of roughly EUR 3.0bn and EUR 500m respectively. LANXESS will hold up to a 40% share of the joint venture. Beginning with the H1 2022 reporting, LANXESS will disclose results of High Performance Materials business line as discontinued operations and as income from at equity after the closing of the transaction. The deal should be completed in the first half 2023 pending anti-trust approvals. Scope assess the risk that no regulatory approval will be granted as low. Scope understands that the Urethane Systems division will be now shown in Reconsolidation and the Engineering Materials division will be terminated as part of the operating reallocation.

      The transfer of High Performance Materials to the new joint venture will have a limited impact on LANXESS’s business risk profile. Scope expects the transfer to weaken the company’s market share, based on the segment’s decent market share globally, including for brands such as TEPEX and product innovations. However, the company’s remaining portfolio and profitability (EBITDA margin) should become more resilient. Additionally, the highly cyclical automobile industry will account for less of group sales, to roughly 5%-10% from 20% in 2021. That said, LANXESS will have a narrower scope and less diversity.

      LANXESS‘s financial risk profile assessment has been lowered to BBB from BBB+ due weaker credit ratios. Leverage ratios Scope-adjusted debt (SaD)/EBITDA and funds from operations/SaD temporarily dipped below Scope’s thresholds for the BBB+ rating. Even though LANXESS’s operations are now more resilient, Scope’s assessment incorporates sufficient headroom for potentially tougher trading conditions in H2 2022. Scope also updated its rating scenario for 2022 to 2024 to account for the impending transaction. Scope now expects a SaD/EBITDA of above 3.0x in 2022 (2021: 3.0x) before decreasing to 2.4x in 2023 and 2.1x in 2024. Key credit ratios deteriorated in 2021 and 2022E from the strong levels in 2018-20. This is mainly due to the two acquisitions – IFF’s Microbial Control business unit (see: LANXESS: Acquisition of Microbial Control business unit of International Flavors & Fragrances) and Emerald Kalama Chemical (see: LANXESS: Acquisition of Emerald Kalama Chemical) –, significant investments in working capital and the related costs for the portfolio reconfiguration. Key credit ratios are expected to improve from 2023 onwards on the back of the Advent International deal as around EUR 1.1bn of the proceeds are earmarked for deleveraging, helped by the assumed continuation of organic growth due to the ability to pass on higher raw materials and energy prices to customers, and the first-time contribution of the two acquisitions. The historically weak free operating cash flow is also expected to improve after High Performance Materials is offloaded, especially as capex requirements will reduce.

      Liquidity remains adequate given the history of strong internal and external liquidity coverage, the well-structured debt maturity profile and access to a EUR 1.0bn credit facility, though offset somewhat by historically poor free operating cash flow. That said, Scope understands that free operating cash flow is improving under the new set-up.

      Regarding supplementary rating drivers, financial policy remains the most important. Scope continues to consider LANXESS’s financial policy as conservative, based on the aim to balance the interests of shareholders and debtholders and the focus on deleveraging to maintain a BBB category rating.

      No key drivers of the credit rating action are considered as ESG factors for the time being. Scope considers the main chemical industry risk to be on the environmental side, as chemical companies usually have a heavy focus on production. There is also litigation risk in the chemicals industry, given possible toxic effects on product users. Apart from the industry risks identified above, we see no company specific ESG factors at this stage.

      Outlook and rating-change drivers

      The Outlook for the issuer rating remains Stable. This mirrors Scope’s updated rating base case, including leverage (SaD/EBITDA) to return below 2.5x in 2023. In hand with our assumption of an ongoing positive trend of company’s profitability, and the company’s ambition to deleverage.

      A positive rating action could 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 pressure if SaD/EBITDA is expected to remain above 2.5x for longer than our rating case currently expect. This could be triggered by a less conservative financial policy, or indication that deleveraging is getting lower importance.

      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; Chemical Corporates Rating Methodology, 22 April 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
      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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
      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: Klaus Kobold, Associate Director
      Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
      The Credit Ratings/Outlook were first released by Scope Ratings on 30 January 2018. The Credit Ratings/Outlooks were last updated on 4 August 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
      © 2022 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. 

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