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Rating action

Scope Ratings GmbH (Scope) has today affirmed the existing subscription rating and has for the first time published its issuer rating of A on France’s Air Liquide S.A. and its financing subsidiary Air Liquide Finance S.A. It has revised the Outlook to Positive from Stable. The S-1 short-term rating and A senior unsecured debt rating have also been affirmed.

Rating rationale

Scope has revised Air Liquide’s financial risk profile to A- from BBB+. This is primarily driven by the improvement of leverage credit ratios, namely Scope-adjusted debt/EBITDA and Scope-adjusted funds from operations/debt, which have been steadily improving over the past two years. Scope-adjusted debt/EBITDA currently stands slightly below 2.0x and Scope expects it to decrease further to 1.7x in 2023 and 2024. This positive trend is primarily driven by robust and stable cash generation, while operating and discretionary free cash flows are hindered by considerable capex spending, inherent to Air Liquide’s business model, albeit relatively high compared to the specialty chemicals sector in general.

Additionally, Scope estimates that the company will maintain a significant level of cash on its balance sheet each year. Coupled with its access to multiple financing tools in both private and public capital markets, this will result in internal and external liquidity coverage ratios sufficient to adequately cover debt maturing in 2023 (EUR 2.0bn) and 2024 (EUR 1.3bn). This further underpins the improvement in the company's financial risk profile.

Air Liquide's issuer rating is also supported by its business risk profile, which has been affirmed at A+, reflecting its market position, expertise, diversification, and profitability in the specialty chemicals industry, as well as its long-term contracts and ability to pass through costs effectively.

The company's strong market position as the second largest global producer of industrial gas in a concentrated market with few global actors contributes significantly to this rating. Furthermore, Air Liquide's expertise in the engineering of air separation units together with its number one position as international patent holder for hydrogen production also places the company well in terms of energy transition and reinforces its market position. Air Liquide's broad geographic and customer diversification is also noteworthy; even though highly cyclical end-markets account for a substantial amount of sales, this is partially offset by the company’s exposure to countercyclical industries such as healthcare, which represents 13% of total revenue, as well as its industrial merchant segment, providing 38% of total revenue and composed of a granular base of customers from different industries. The company's profitability in the specialty chemicals industry is strong, stable and benefits from good business visibility derived from medium-to-long-term contracts. These contracts include take-or-pay clauses and clauses to pass through energy costs effectively.

Scope has evaluated Air Liquide's ESG approach and considers it a positive factor in the overall assessment. Air Liquide has established a Sustainable Financing Framework to align its financing strategy with its sustainability objectives and to contribute to the development of sustainable finance. Notably, the company completed its first green bond issue in May 2021, raising EUR 500m to finance and refinance several sustainable development projects, including some related to hydrogen, biogas, and oxygen. This further reinforces Air Liquide's overall ESG approach and supports Scope’s assessment of its business and financial risks (ESG Factor).

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

Outlook and rating-change drivers

The Positive Outlook reflects the expectation that Scope-adjusted debt/EBITDA will move towards 1.5x in the medium term.

An upgrade could be considered if Scope-adjusted debt/EBITDA reached 1.5x and were sustained at that level. This could be the consequence of successful efforts to lift profitability, closing the gap with US-based competitors, and/or a shareholder remuneration more aligned with cash preservation goals.

A negative rating action, such as a return to a stable outlook could be considered if Scope-adjusted debt/EBITDA were to increase again.

Further downside may result if Scope-adjusted debt/EBITDA were to persistently exceed 2.5x, e.g. if Air Liquide’s financial policy became more geared towards shareholder interests.

Long-term and short-term debt ratings¹

Scope has also affirmed the S-1 short-term rating, reflecting that Air Liquide’s internal and external sources of liquidity, banking relationships and standing in the capital markets are all deemed ‘better than adequate’ based on Scope’s Corporate Rating Methodology.

All senior unsecured debt has been affirmed at A, the level of the issuer rating.

1. Editor’s note: This section was added on 10 May 2023 to correct for the section’s omission from the original rating action release published on 5 May 2023.

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 Outlooks, (General Corporate Rating Methodology, 15 July 2022; Chemical Rating Methodology, 17 April 2023), 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 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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Ivan Castro Campos, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 9 July 2020. The Credit Ratings/Outlooks were last updated on 18 June 2021.

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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