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Rating action

Scope Ratings GmbH (Scope) has today affirmed the A-/Stable issuer rating on Norwegian specialty chemicals supplier Borregaard ASA. Concurrently, Scope has also affirmed the A- rating on senior unsecured debt issued by Borregaard ASA and the S-1 short-term debt rating.

Rating rationale

The rating affirmation reflects Borregaard’s resilient operating results and stable credit metrics despite challenging market conditions with economic slowdown in some end-markets (e.g. construction) as well as customer destocking hitting the chemical industry. The rating also reflects the company’s good competitive positioning, supported by its unique and proven business model within wood-based specialty chemicals, strong market positions in key product segments, good diversification, and high profitability margins. The rating remains supported by the company’s strong financial risk profile.

Borregaard’s business risk profile (assessed at BBB+) is driven by solid market positions and high profitability. The company operates one of the world’s most advanced biorefineries, producing highly specialised chemicals and materials from wood (positive ESG factor). This provides high physical, financial and intellectual barriers to entry. In terms of products, the company is the world’s largest supplier of lignin-based chemicals with an estimated market share of 35%-40% of global supply, offering a wide range of specialised products for various applications in industries ranging from construction to pharmaceuticals and agriculture. The company also has solid positions in other products such as specialty cellulose, biovanillin, fine chemical intermediates, and advanced bioethanol.

The company’s solid market positions and good cost position are reflected in high achieved EBITDA margins of 20%-25%. The resilience of operating results is also backed by good diversification with more than 800 products sold to more than 3,000 customers in around 100 countries. In addition, Borregaard enjoys good pricing power for many of its products, as evidenced by the large price increases and surcharges passed on to customers in 2022 to compensate for rising inflation and energy costs.

Nevertheless, the company is still exposed to competition from cheaper, fossil-based products, which is particularly noticeable in times of economic downturn when customer’s purchasing power is under greater pressure. Another limiting factor is some exposure to cyclical end-markets, mostly the construction industry, which accounts for around 20% of revenues. Finally, the company is sensitive to FX risk as the majority of sales are denominated in USD and EUR, while costs are mainly incurred in NOK.

Borregaard reported EBITDA of NOK 1.8bn in 2023, approximately NOK 0.1bn higher than in 2022. The good EBITDA performance was driven by improved results in the company’s BioMaterials and FineChemicals segments, which more than offset a slightly weaker year-over-year performance of BioSolutions. Looking ahead to 2024, Scope expects the company to maintain good operating results, with good demand for lignin-based biopolymers, specialty cellulose, fine chemical intermediates and advanced bioethanol offsetting the negative effects of lower demand for vanillin and the slowdown in the construction market. There could be some pressure on profitability margins from increases in certain cost items, such as wood and personnel. Overall, Scope forecasts Scope-adjusted EBITDA of NOK 1.7bn-1.9bn in 2024-2026, with a margin of 23%-25%.

The company’s unchanged financial risk profile (assessed at A) is driven by low financial leverage, with Scope-adjusted debt/EBITDA averaging 1.3x over the last five years. The low debt levels is explained by strong cash flow generation, moderate capex, moderate M&A, and a prudent financial policy. Typically, the company aims to reduce its leverage towards the lower end of its target range (net debt/EBITDA of 1.0x-2.25x) during periods of macroeconomic uncertainty and/or heightened FX risk (i.e. weak NOK against EUR and USD). This has resulted in good financial flexibility in recent years, which continued in 2023 with leverage ending the year broadly in line with 2021-2022 levels of close to 1.0x. Scope believes the company will seek to maintain a leverage (Scope-adjusted debt/EBITDA) of around 1.0x into 2024 given the unstable conditions in some of its end markets, but also due to the current weak NOK.

Interest coverage is expected to remain at a very strong level of over 10.0x in 2024- 2026. After peaking in 2024, interest costs are expected to improve in 2025 and 2026 supported by falling interest rates and amortisation of the more expensive term loan for LignoTech Florida.

The company continues to deliver good cash flow generation with Scope-adjusted free operating cash flow/debt of 13%-45% in 2022-2023 and a level of 19%-27% forecasted for 2024-2026. The forecast assumes annual capex of NOK 0.9bn, which is higher than in the past and includes a large proportion of discretionary projects. The capex is expected to be used for further specialisation, increased flexibility and debottlenecking at the Sarpsborg site, carbon reduction initiatives and ordinary maintenance.

Liquidity is adequate. At the end of 2023, the company had available cash and cash equivalents of NOK 464m and committed undrawn credit lines of NOK 1.5bn. This compares with financial debt maturities of NOK 151m in 2024 and NOK 81m in 2025. Liquidity is further supported by positive forecasted free operating cash flow of between NOK 360m-490m per year.

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

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s belief that Borregaard’s solid market positions and diverse product portfolio of specialty wood-based chemicals will continue to drive its operating results. It also reflects the good headroom in credit metrics in the medium-term, as illustrated by forecasted Scope-adjusted debt/EBITDA of slightly above 1.0x in 2024- 2026. This helps to offset heightened FX risk with NOK currently being historically weak against EUR and USD. The Outlook also assumes no change in financial policy.

A rating upgrade could be warranted by a sustained Scope-adjusted debt/EBITDA below 1.0x, which would likely require a change in financial policy given the company’s target range for net debt/EBITDA of between 1.0x and 2.25x.

A rating downgrade could be triggered if Scope-adjusted debt/EBITDA remained at 2.0x or above, possibly due to lower-than-expected profitability, significant debt-financed investments and/or a change in financial policy.

Long-term and short-term debt ratings

Senior unsecured debt is rated at the same level as the issuer, with Borregaard ASA also being the bond-issuing entity. Borregaard’s senior unsecured bonds have standard bond documentation, including pari passu and negative pledge.

The S-1 short-term rating reflects the underlying issuer rating of A-/Stable and the company’s strong short-term debt coverage, as well as good access to external funding from banks and debt 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 Outlook, (General Corporate Rating Methodology, 16 October 2023; Chemicals 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, the Rated Entity, third parties 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 Outlook are based. Following that review, the Credit Ratings and/or Outlook 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: Per Haakestad, Senior Specialist
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook 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.
 
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