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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Norwegian chemicals company Elkem ASA (Elkem) to BBB-/Stable from BBB/Negative. Concurrently, the senior unsecured debt rating has been downgraded to BBB- from BBB. The short-term debt rating has been affirmed at S-2.

The rating action is driven by a slower-than-expected recovery in credit metrics amid ongoing market headwinds, resulting in a downward revision of the financial risk profile to BBB from BBB+. Given the current pressure on profitability, particularly in the company’s Silicones division, the agency expects leverage (Scope-adjusted debt/EBITDA*) to remain at 2.5x or above in 2024-2025, despite a positive impact from the company’s ongoing EBITDA improvement program.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BBB- (unchanged). With 31 production sites worldwide, Elkem's business risk profile reflects its unchanged position as an integrated player in the global silicon value chain, with a balanced geographical footprint due to its separate value chains in China and Europe. Elkem has a reasonable market share in silicones, and holds a solid position in silicon, ferrosilicon and foundry alloys in the western world, with a sizeable share in global production capacities. It also dominates niche markets such as microsilica and electrode paste. Elkem's diversification remains hampered by the moderate contribution of specialty chemicals to revenues, which exposes the company to cyclical (i.e. commodity-like) market dynamics and limits its ability to exercise real pricing power.

The company's competitive position benefits from a strong cost position in Silicon Products, as most of the division's production sites are in areas with low-cost renewable energy sources (e.g. Norway and Iceland). The Silicones division's cost position in China is comparatively weaker, albeit likely to improve with the recent opening of a new production line, which reportedly is one of the lowest-cost silicone producers in the country.

Profitability (Scope-adjusted EBITDA margin) is historically good, albeit volatile, averaging 18.2% over 2018-2023. While Scope notes the exceptional profitability of 28.2% in 2022 due to limited silicon supply amid surging energy costs and strong demand, the company's EBITDA margin declined to 10.8% in 2023 and remains below average at 12.2% in 9M 2024. The weakening is mainly driven by weaker but still good performance in Silicon Products, coupled with deteriorating pricing dynamics in Silicones due to low demand and current overcapacity in China.

Financial risk profile: BBB (revised from BBB+). The deterioration in EBITDA and increased debt in 2023-2024 has negatively impacted the company’s credit metrics. This, combined with the likelihood that continued market headwinds could weigh on Elkem’s financial performance for a longer period than previously anticipated by Scope, has led to a one-notch downward revision of the financial risk profile assessment.

The agency expects leverage (Scope-adjusted debt/EBITDA) to remain at 2.5x or above in 2024-2025. This is broadly in line with the level at Q3 2024 of 2.9x following a peak at Q2 2024 of 3.3x. The projected deleveraging in H2 2024 is mainly supported by the ongoing EBITDA improvement program (NOK 1.0bn realised in 9M 2024 with an estimated full-year impact of NOK 1.4bn), which is expected to support an annual EBITDA of slightly above NOK 4bn in 2024-2025, compared to NOK 3.7bn in 2023. The funds from operations/debt ratio is expected to be around 25-30% in the medium term, while debt protection, as measured by EBITDA interest coverage, is expected to fall below 6x in 2024 before rising above this level again in 2025.

Following the recently completed upstream silicone expansion projects in China and France, the company has no major capex commitments beyond normal maintenance. This gives Elkem the flexibility to maintain low levels of investment over the next few years, if necessary to support credit metrics.

Liquidity: adequate (unchanged). Liquidity is adequate as upcoming debt maturities are well covered, supported by a substantial cash position of NOK 6.5bn at Q3 2024 and an undrawn EUR 500m revolving credit facility with maturity in 2029. This compares with upcoming debt maturities of NOK 0.6bn in Q4 2024, NOK 1.2bn in 2025 and NOK 2.9bn in 2026.

Scope expects the company to meet all financial covenants in its base case. However, the interest cover ratio (net interest expense to EBITDA) weakened rapidly throughout 2023, bottoming out at 3.8x at Q2 2024 before improving to 4.6x at Q3 2024. These levels are within the applicable threshold (i.e. above 3x) under the temporary waiver obtained by Elkem in Q1 2024 for each of the quarters in 2024. The threshold will revert to 4x in Q1 2025. Scope expects the company to maintain an interest cover ratio above this level next year, mainly supported by the upward trend in EBITDA performance in H2 2024.

Supplementary rating drivers: credit-neutral (unchanged). The rating incorporates no adjustments related to financial policy, peer group considerations, parent support, or governance and structure.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation of leverage remaining elevated but below 3x due to continued pressure on profitability in the short- and potentially medium-term. This is despite the positive impact of the company’s cost and optimisation initiatives and a reduction of discretionary cash outflows. Scope’s Outlook also anticipates an improvement in cash flow cover.

The upside scenarios for the ratings and Outlook are (individually or collectively):

1. Leverage as measured by debt/EBITDA sustained below 2.5x
    
2. Cash flow cover improving towards 15%

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA increasing to significantly above 3x (although currently seen as remote)

Debt ratings

The downgraded BBB- senior unsecured debt rating is in line with the issuer rating.

The short-term debt rating has been affirmed at S-2. It is based on the BBB-/Stable issuer rating and reflects Elkem’s better-than-adequate liquidity cover as well as adequate banking relationships and standing in capital markets.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Elkem ASA

Issuer rating: BBB-/Stable, downgrade

Short-term debt rating: S-2, affirmation

Senior unsecured debt rating: BBB-, downgrade

*All credit metrics refer to Scope-adjusted figures.

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, 16 April 2024), 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, Outlook 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 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, Analyst
Person responsible for approval of the Credit Ratings: Thomas Faeh, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 17 December 2021. The Credit Ratings/Outlook were last updated on 21 December 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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