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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of A-/Stable to Norwegian specialty chemicals supplier Borregaard ASA. Scope has also assigned first-time ratings of A- to senior unsecured debt issued by Borregaard ASA and S-1 to short-term debt.  

Rating rationale

The company’s business risk profile (assessed at BBB+) reflects its efficient and unique process to produce highly specialised chemicals and materials using wood as raw material (positive ESG factor), its strong positions in most of its business segments, the growing demand among customers, and its favourable cost position. 

The company is the world’s largest supplier of lignin-based chemicals, with a wide array of specialised products for various applications across numerous industries ranging from construction to pharmaceuticals and agriculture. As of 2022, the company had an estimated 35-40% of the volume in the global market. It also holds strong positions in other markets, including for biovanillin and specialty cellulose. The biovanillin market has historically been dominated by low-cost producers offering synthetic and ethyl vanillin. However, as preferences of consumers, companies and lawmakers skew towards sustainable options, the company’s ability to produce large quantities of bio-based vanillin, whilst maintaining purity and quality, is a competitive advantage. In specialty cellulose, the company’s leading position is protected by its offering of highly specialised products tailored to the production infrastructure of the segments large customers, which has led to a very sticky customer base. The company’s market positions are also protected by high entry barriers. These include physical barriers due to the inherent difficulty to access raw materials such as lignin from the sulfite pulping process, caustic soda and energy; financial barriers created by the high cost to replicate Borregaard's production process; and intangible barriers created by the high level of intellectual property (partly patent protected).

These market positions are reflected in strong and stable EBITDA margins of around 20%. Diversification has helped to keep EBITDA margins stable, with over 800 products sold to over 3,000 customers across 100 countries. This has been supported by the limited direct competition as well as a favourable cost position, where energy is secured on favourable long-term contracts, two-thirds of a key input factor (caustic soda) is covered by own production, and wood as a raw material is readily available. Lastly, the company has strong pricing power, evident in 2022 when it applied substantial price increases and surcharges to customers to compensate for elevated inflation and energy costs.

Even so, the company will remain exposed to competitors from countries producing cheaper, fossil-fuel-based products as long as such products are not banned by law. The company also derives 24% of its turnover from the construction industry, which has above-average cyclicality. The latter risk is partly mitigated by the company’s efforts to reduce sales in concrete application. Still, these aspects somewhat limit the business risk assessment.

The company’s financial risk profile (assessed at A) reflects its low financial leverage, with Scope-adjusted debt/EBITDA averaging 1.5x over the past five years. The low debt levels can be explained by strong cash flow generation, moderate capex, moderate M&A, and a prudent financial policy where the company has remained on the low end of its net interest-bearing debt/EBITDA target range (1.0x-2.25x) in times of historically weak NOK and/or economic uncertainty.

Scope’s base case assumes that Borregaard’s medium-term top line will be driven by inflation passed on in higher sales prices as well as moderate capacity increases. Whilst Scope expects the elevated inflation and energy prices to be mostly passed on to customers, we expect it to apply some downward pressure on profitability in 2023 and parts of 2024. Scope also expects the company to skew its product mix towards less cyclical products to mitigate the potential impact of the impending recession, but such products are also less profitable. Towards the end of the forecast, Scope expects profitability to increase as economic conditions normalise and the company’s new energy optimisation investment completed in 2024.

Lastly, Scope has assumed dividends paid will align with the recent history of increasing by NOK 0.25-0.5 per share annually, translating to a total annual dividend payout of 40-50% of earnings per share. Scope believes that the company’s strong operating performance can compensate for most of the increased expenditure planned for the medium term. In sum, Scope-adjusted debt/EBITDA is forecast to stay around 1.1x in 2023 and 2024, despite free operating cash flow being under more pressure than in recent years.

Liquidity is adequate. As of year-end 2022, the company had NOK 234m in cash and equivalents and around NOK 1.5bn in unused committed credit facilities against only NOK 590m in short-term interest-bearing liabilities. The company has ample headroom under its financial covenant of net interest-bearing debt/EBITDA of less than 3.5x, with the actual figure of 1.06x at year-end 2022.

One or more key drivers of the credit rating action are considered an ESG factor.  

Outlook and rating-change drivers

The Stable Outlook reflects our belief that Borregaard’s strong market positions will continue to shape its performance in the medium term. It also assumes that leverage will stay conservative despite the new higher-than-historical investment programme.

A rating upgrade may be warranted by a Scope-adjusted debt/EBITDA sustained below 1x, for example, due to lower-than-projected discretionary expenditure.

A rating downgrade could be warranted by a Scope-adjusted debt/EBITDA above 2x, possibly through lower-than-expected profitability or higher-than-expected debt-financed capital expenditure.

Long-term and short-term debt ratings

Scope has assigned an initial A- rating for the company’s senior unsecured debt. This is in line with the issuer rating, based on the negative pledge and pari-passu conditions. 

Scope has also assigned an initial S-1 short-term debt rating. This is based on the supportive internal and external sources of liquidity (NOK 1.5bn in unused facilities and NOK 234m in cash reserves at year-end 2022), positive cash flow generation and adequate access to the capital 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 Outlooks, (General Corporate Rating Methodology, 15 July 2022; Chemicals 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 third parties.
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 Outlooks 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 Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Michael - Marco Simonsen, Associate Director
Person responsible for approval of the Credit Ratings: Tomas Faeh, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 23 March 2023.  

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

Conditions of use/exclusion of liability 
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