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 issuer rating on Elkem ASA. Scope has also affirmed the S-2 short-term rating and BBB senior unsecured debt rating.

Rating rationale

Elkem’s business risk profile, affirmed at BBB-, continues to reflect Elkem’s position an integrated player in the global silicone industry, strong cost position and good global footprint with 30 production plants worldwide. The company’s cost position has provided a tailwind in 2022 amid surging European power prices, as most of its European production facilities are in areas with lower-cost renewable energy sources. This will continue to benefit profitability, with Scope-adjusted EBITDA margins forecast to surpass historical averages in the medium term. However, the lower contribution to sales from higher-margin, specialty-like products, and the higher contribution from cyclical end-markets are hampering the business risk profile.

The financial risk profile, affirmed at BBB+, continues to be the strongest aspect of Elkem’s overall assessment. The company’s financial flexibility was reinforced in 2022 by record earnings and their impact on Scope-adjusted metrics. Going forward, Scope expects good but normalising metrics. This will be driven by the expectation of normalising EBITDA margins paired with high growth capex. A NOK 3.8bn investment is set to expand capacity at the Chinese Xinghuo silicone plant, strengthening Elkem's position in silicones, in line with its specialisation strategy; production is scheduled to start in H1 2024. Smaller bolt-on acquisitions are also highly likely, exemplified by the 2022 acquisition of Belgian refractories company KeyVest. Recently, capex was mostly financed through internally generated cash, which hampered free operating and discretionary cash flows, and Scope understands this will continue for the next years. As a consequence, some of Elkem’s investments will likely be debt financed. Scope also expects Elkem to pay dividends at above historical average but in the mid-range of its stated dividend policy (30%-50% of net income). This view is supported by the NOK 1.9bn in dividends paid in 2022, based on 2021 performance. Lastly, Elkem’s liquidity remains adequate, given the sound internal and external liquidity coverage, particularly after it established a EUR 500m term loan and EUR 500m revolving credit facility in 2022 to refinance a larger 2023 maturity of NOK 4.1bn.

Regarding supplementary rating drivers, financial policy and parent support remain the most important, though the assessment led to no rating adjustment. In this context, Elkem’s financial targets remain sound and Scope is confident that management will strive to preserve the capital structure in the event of any weakening in market conditions or increase in expansionary investment. 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. Scope makes no adjustments for this ownership, but acknowledges the proven cooperation between Elkem and its direct parent company.

Environmental, social and governance factors have no impact on the rating and none are specific to the company at this stage.

Outlook and rating-change drivers

The Stable Outlook assumes financial targets will be maintained, which should result in prudent growth ambitions and would keep Scope-adjusted debt/EBITDA in the 1-2x range in the medium term.

A positive rating action could be warranted if profitability improved and growth investments decreased, leading to positive and sustained free operating cash flow directed towards strengthening the balance sheet, exemplified by a Scope-adjusted debt/EBITDA sustained below 1.0x. In the long term, a positive rating action could also occur if overall business risks improved through a higher specialty chemicals exposure or an improved competitive position.

A negative rating action is possible if Scope-adjusted debt/EBITDA reached 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

Elkem ASA is the bond-issuing entity, and the senior unsecured rating has been affirmed at BBB, in line with the issuer rating.

The S-2 short-term rating has also been affirmed and continues to reflect the company’s sufficient short-term internal and external debt coverage paired with good access to banks, including to undrawn credit facilities, as well as equity and debt markets.

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 these Credit Ratings and/or Outlook, (Chemical Corporates Rating Methodology, 22 April 2022; Corporate Rating Methodology, 15 July 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 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 Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: the Rated Entity, public domain 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 these 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 Outlooks 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: Michael-Marco Simonsen, Associate 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
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund 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.