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Rating action

Scope Ratings GmbH (Scope) has upgraded the issuer rating of LANXESS AG to BBB from BBB- and assigned a Stable Outlook. Concurrently, Scope has upgraded the senior unsecured debt rating to BBB from BBB- while affirming the short-term debt rating at S-2. The rating action resolves the under-review status for a possible upgrade due to methodology changes.

The upgraded issuer rating primarily reflects LANXESS’ improved business risk profile assessment upon applying Scope’s updated chemicals rating methodology. This is largely due to a more favourable assessment of risk mitigation through diversification as well as a more granular analysis of operating profitability. The issuer’s continued efforts to restore its financial risk profile as it deleverages also supports the higher rating, as evidenced by its recovering EBITDA and reduction of net debt.

The rating action also addresses the correction of previous calculation errors which materially affected credit metrics and its components. The errors related to the computation of Scope-adjusted interest*, EBITDA and, consequently, funds from operations (FFO) and free operating cash flow (FOCF). The corrections had a slightly positive impact on the rating construct and the assessment of key rating factors.

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 improved assessment of LANXESS’ business risk profile is the primary factor in the upgrade of its issuer rating. This followed Scope’s re-assessment of the company’s business risks upon applying its updated chemicals rating methodology, which provides higher granularity for the assessment of business risks as well as LANXESS’ ongoing progress in recovering its margin profile and reducing portfolio risk.

LANXESS’ market position in specialty chemicals remains strong, largely due to its various leadership positions in medium-sized, high-barrier niche markets, which provide some resilience against broader industry volatility. These markets are characterised by few dominant players and regulatory barriers, which reduce competition, particularly in LANXESS’ strongest division, Consumer Protection. The company’s ability to offer tailored configurations for a wide range of customers enhances pricing power, making substitution difficult and allowing LANXESS to pass on fluctuations in procurement costs.

Continual disposals and acquisitions to restructure the portfolio over the last decade have led to a more focused presence in resilient market segments in which LANXESS enhanced its market standing and technological depth which in turn secure the company’s sustained market leadership positions (e.g. integration of acquired Emerald Kalama and International Flavors & Fragrances' [IFF] microbial control business within the Consumer Protection segment). While LANXESS faces industry-wide challenges, for instance, agrisector destocking since 2022, it has not lost market share, demonstrating its solid competitive position.

Scope believes that credit risks are largely reduced through the company’s extensive diversification as displayed by the diversity of regions, production capacity (assets), customers and industries. LANXESS benefits from extensive diversification, operating in over 30 countries. As such, its global footprint mitigates risks from regional economic fluctuations, geopolitical instability, and regulatory changes, ensuring granular cash flow streams. Asset diversification and local production further spreads operational risks, with about 50% of assets in the Americas and about 40% across EMEA (based on non-current assets), reducing the dependence on any single region.

Nonetheless, the significant exposure to vulnerable and/or cyclical industries, including construction, automotive and chemicals sub-segments, continues to pose major credit challenges. While this exposure has reduced as part of the portfolio restructuring, to 45% in 2024 from around 70% before 2020, it remains high enough to present credit risks from volume effects, which is evident in LANXESS’ capacity utilisation and margin pressure between 2022 and 2024.

LANXESS’ profitability, measured by its adjusted EBITDA margin, has been under pressure since 2022, with average levels falling to 8.5% in 2023-2024 from 14% before 2022. This was mainly driven by weak demand, customer destocking, significant idle costs and raw material inflation. While its core customers still face business challenges, LANXESS’ margin recovery over the past quarters across all business divisions is encouraging, showing that initiatives including the substantial FORWARD! cost savings programme and strategic portfolio shift toward higher-margin products are bearing fruit. Moreover, Scope expects the gradual margin recovery to be supported by an end of an industry-wide customer destocking, e.g. in the agrisector, leading to an improved capacity utilisation, as well as a reduced margin-dilutive impact from inflationary trends. Scope projects that the EBITDA margin will further recover to 10%-11% over the next three years.

While the overall margin profile remains a major rating constraint, being well below those of global chemicals corporate peers, Scope believes that LANXESS has a solid ability to pass on higher raw material costs to customers and sustain a good capital efficiency, with a return on capital employed (ROCE) of about 10% well exceeding the estimated cost of capital. This provides good visibility that LANXESS can cover operating expenses and capital costs well, even during more challenging times.

Financial risk profile: BBB- (revised from BB+). The improved financial risk profile also supports the rating upgrade, though remains a key constraint on the issuer rating.

LANXESS’ credit profile was under significant pressure from 2022 to 2024, shown by the weakening in the key credit metrics of leverage and cash flow cover. Key challenges included i) pressure on EBITDA caused by customer destocking amid inflation and economic uncertainty, ii) the reduction of the historically high cash buffer; and iii) the discontinuation of hybrid debt issuance for corporate funding. However, long-term financial stability is clearly improving following the issuer’s active efforts to restore the financial profile to pre-2022 levels along its deleveraging strategy and creditor-focused financial policy.

Going forward, Scope expects leverage - as measured by debt/EBITDA and FFO/debt – to recover to 3.0x-3.5x and 25%-30% in 2025 (against 4.3x and 15% respectively in 2024). This improvement will follow the disposal of the Urethane division on 1 April 2025, whose sales proceeds were used to redeem the maturing EUR 500m bond in May 2025, as well as the ongoing recovery of operating results.

Leverage metrics are very likely to stabilise further over the next few years. This will likely be bolstered by i) a continued EBITDA recovery, thanks to the FORWARD! cost savings, the focus on higher-margin products and higher capacity utilisation driven by customer restocking; ii) potentially smaller asset disposals; and iii) stringent capex control and shareholder remuneration to help meet the medium-term leverage target (net financial debt/EBITDA of towards 2.0x over the medium term). Positive FOCF and discretionary cash flow will provide headroom for such deleveraging.

Furthermore, Scope strikes that, if certain conditions are met, LANXESS will have the first opportunity to sell its 40% minority stake in Envalior in 2026. If LANXESS uses this opportunity, its indebtedness and credit metrics would improve significantly through the recognition of disposal proceeds and the repayment of a substantial shareholder loan. Scope notes that such a positive effect, conservatively estimated at around 0.7x debt/EBITDA, is not yet reflected in its rating case.

Scope’s view on an improved financial risk profile is eventually supported by the reliably strong debt protection as measured by an EBITDA interest coverage of more than 10x, a level which the company can even largely protect during challenging times. Interest cover benefits from the very low average interest rate of just around 1.5% on senior debt (in 2024 – based on Scope’s calculations) and the largely offsetting effect of interest income on significant pension assets for the overall interest burden on pension obligations. Going forward, the agency expects interest coverage to remain strong within a range of 10x-13x, considering the projected EBITDA growth and only marginally increasing interest payouts amid a gradually increasing average interest rate. The latter is driven by the cash-paid redemption of the EUR 500m bond in May 2025, and the upcoming refinancing of bonds in 2026 and 2027, all of which have below-average interest rates.

Liquidity: adequate (unchanged). LANXESS' credit profile is secured by robust liquidity and financial flexibility. No debt positions are due for refinancing in 2025 following the cash-financed redemption of the EUR 500m bond in May 2025, largely covered by the Urethane disposal proceeds. Further, Scope projects that the cash buffer will largely cover debt maturing in 2026 (EUR 500m) and 2027 (EUR 600m), supported by two largely undrawn credit facilities (EUR 800m sustainability-linked revolving credit facility and EUR 550m bilateral credit facility).

Supplementary rating drivers: credit-neutral (unchanged). The rating has no adjustments related to financial policy, peer group considerations, parent support, or governance and structure. Nonetheless, Scope acknowledges LANXESS’ risk-averse financial policy, particularly the company's public commitment to securing a "solid investment-grade rating" and to deleverage to a net financial debt/EBITDA of less than 3.0x over the medium term. Measures to ensure this policy is upheld also provide reassurance of a likely return to an investment-grade leverage over the medium term.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation of a stabilisation of LANXESS’ indebtedness, as measured by leverage (debt/EBITDA) sustained at 3.5x or below, supported by ongoing portfolio optimisation, cost savings, and cash-financed deleveraging, bolstered by strategic asset disposals.

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

• Debt/EBITDA below 3.0x on a sustained basis
   
• Cash flow cover (FOCF/debt) above 20% on a sustained basis

The downside scenarios for the rating and Outlook are (individually):

• Deteriorating financial risk profile caused by concerns that debt/EBITDA would stabilise well above 3.5x due to ineffective debt reduction and/or a subdued margin recovery
   
• Deteriorating business risk profile through renewed pressure on operating profitability with no or longer-than-expected recovery to a double-digit EBITDA margin or the ROCE nearing 5%

 Debt ratings

Following the upgrade of the underlying issuer rating, Scope has also upgraded the rating for senior unsecured debt to BBB from BBB-.

The short-term debt rating has been affirmed at S-2, which is based on the underlying BBB/Stable issuer rating and the company’s consistently robust liquidity, as well as its strong access to external funding from banks and debt capital markets.

The rated debt is issued by LANXESS AG.

Environmental, social and governance (ESG) factors

While chemicals companies are naturally exposed to environmental and social controversies and could face litigation risk, Scope has not identified company-specific ESG factors at this stage that would have a credit impact.

Still, it is worth mentioning that some of LANXESS’ funding, including bonds and credit facilities, are linked to ESG-related key performance indicators, e.g. the proportion of women in management positions and science-based targets such as Scope 1, 2 and 3 emissions, which signal the company’s strong awareness of social and environmental controversies.

All rating actions and rated entities

LANXESS AG

Issuer rating: BBB/Stable, upgrade

Short-term debt rating: S-2, affirmation

Senior unsecured debt rating: BBB, upgrade

*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, 30 June 2025), 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: Sebastian Zank, Managing 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 7 July 2025.

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
© 2025 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab GmbH and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin. Public Ratings are generally accessible to the public. Subscription Ratings and Private Ratings are confidential and may not be shared with any unauthorised third party.