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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of LANXESS AG to BBB- maintaining the Negative Outlook. Scope has also downgraded LANXESS’ senior unsecured debt rating to BBB-. The short-term debt rating was affirmed at S-2.

The downgrade reflects the slower-than-anticipated deleveraging process, driven by excess inventory in the chemical products market. While Scope anticipates deleveraging to materialise, the prolonged inventory imbalance has exerted sustained pressure on EBITDA, resulting in a structural deterioration.

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- (revised from BBB). The business risk profile has weakened, reflecting the persistent erosion of profitability driven by a prolonged destocking cycle across the chemical sector. LANXESS has faced demand weakness in industrial markets, resulting in lower pricing levels, though margins are recovering with partial pass-through of cost savings. As a result, the average Scope-adjusted EBITDA* margin over the period 2021-2024 has deteriorated by 90 basis points to 9.3%, remaining at the lower end of the specialty chemicals sector. This highlights LANXESS' weaker pricing power and cost rigidity compared to higher-margin peers. This is somewhat offset by LANXESS presence in the US market, where the company regained market share in 2024. The presence in the US also serves as a mitigating factor against the uncertainty of possible tariffs. In addition, LANXESS’ focus on specialty chemicals is another layer of protection against possible tariffs on US imports, as its products are needed by the industry and difficult to replace.

Scope acknowledges the company's efforts to mitigate profitability pressures through its FORWARD! programme, which has yielded tangible cost savings. However, while these measures have partially offset margin compression, they do not fundamentally address the structural headwinds impacting LANXESS' earnings profile. Without these initiatives, the deterioration in profitability would have been even more pronounced, underscoring LANXESS' reliance on operational efficiencies rather than organic margin expansion.

Despite these challenges, LANXESS retains key competitive advantages, including its leading market positions and strong customer relationships across specialty chemicals segments. The increasing focus on high-value specialty chemicals – which typically offer greater pricing resilience and lower cyclicality – supports long-term business stability. Additionally, diversification across end markets remains a critical mitigant, as it reduces dependence on highly volatile industrial demand cycles.

Financial risk profile: BB+ (revised from BBB-). LANXESS' deleveraging trajectory has been slower than anticipated, both in terms of timing and magnitude, exerting downward pressure on credit metrics. Debt/EBITDA is projected to remain around 4.5x in 2024 – well above pre-crisis levels. Scope expects this metric to improve to around 3.5x in 2025, subject to the successful execution of deleveraging initiatives, including the redemption of the bond maturing in May 2025 using EUR 460m of proceeds from the sales of the Urethanes division, which is planned for H1 2025. While the reduction in gross debt provides a near-term relief to leverage, it does not in itself restore financial flexibility.

Interest coverage metrics have rebounded from 2023 lows, reflecting lower financing costs and stabilising EBITDA. EBITDA/interest cover, which fell to 3.3x in 2023, is expected to trend upward, surpassing 5x in 2024 and reaching around 7x by 2026, reinforcing the company’s financial resilience. However, the sustainability of this improvement hinges on continued operational recovery and disciplined cost execution.

LANXESS retains a potential strategic lever to further reduce leverage through the sale of its 40% stake in Envalior. While a valuation multiple of 12x EBITDA has been suggested, a final transaction price and the occurrence and timing of such a transaction do remain uncertain, introducing an element of execution risk. As a result, proceeds from this potential divestiture have not been incorporated into Scope’s base case, leaving some uncertainty around the company’s long-term deleveraging path.

Despite improving interest coverage, cash flow-based credit metrics remain tight. While working capital releases and cost-saving measures have helped stabilise cash generation, free operating cash flow remains constrained, limiting financial flexibility.

Liquidity: adequate (unchanged). Liquidity remains adequate, underpinned by a solid cash position and reinforced by EUR 800m in undrawn revolving credit facilities and EUR 750m in committed bilateral lines, all free of financial covenants. The anticipated EUR 460m in disposal proceeds in H1 2025 will further bolster liquidity, facilitating the redemption of the bond maturing in May 2025 and mitigating near-term refinancing risk. While free cash flow generation remains constrained, the company’s disciplined financial policy and access to diversified funding sources provide a buffer against potential market volatility.

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

Outlook and rating sensitivities

The Negative Outlook reflects the remaining risks associated with LANXESS's gradual stabilisation of credit metrics to a level commensurate with an investment grade rating. The Outlook takes into account the company's commitment to maintaining its investment grade status, including the cost reductions under the FORWARD! Programme, its flexible dividend policy and planned strategic divestments, including the EUR 460m sale of the Urethane business in H1 2025, which will support debt reduction. However, there are factors beyond the company's control related to the pace of market and earnings recovery which, if weaker than expected, could result in credit metrics remaining weak for a prolonged period.

The upside scenario for the ratings and Outlook is:

1. Debt/EBITDA at or below 3.5x

The downside scenario for the rating and Outlook is:

1. Debt/EBITDA at above 3.5x

Debt ratings

Scope has affirmed LANXESS’ short-term debt rating at S-2. This is grounded on its BBB-/Negative issuer rating, the ‘better-than-adequate’ internally and externally provided liquidity coverage as well as its good banking relationships and standing in capital markets. The senior unsecured debt rating has been downgraded to BBB-, the level of the issuer.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

LANXESS AG

Issuer rating: BBB-/Negative, downgrade

Short-term debt rating: S-2, affirmation

Senior unsecured debt rating: BBB-, downgrade

The rating was prepared with the application of Scope’s General Corporate Rating Methodology, 16 October 2023. The application of the General Corporate Rating Methodology, 14 February 2025, does not have an impact on the rating.

*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, 14 February 2025; 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, 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 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: Ivan Castro Campos, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 January 2018. The Credit Ratings/Outlook were last updated on 19 February 2024.

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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