Austria-Based Borealis AG 'BBB+' Ratings On CreditWatch Negative On Expected Change In Controlling Shareholder

  • Borealis recently announced that its controlling shareholder Mubadala Development Company (MDC) signed a formal agreement to sell a 39% stake to its minority shareholder OMV.
  • Subject to customary approvals, OMV will become the majority shareholder (75%) of Borealis, and MDC will retain 25%. The transaction is expected to close in 2020.
  • We anticipate that the change in ownership will result in Borealis losing credit support from MDC and the Abu Dhabi government.
  • We are therefore placing our 'BBB+' rating on Borealis on CreditWatch with negative implications, reflecting that we could downgrade Borealis by one notch when the transaction closes, depending on our view of OMV's credit profile and its impact on Borealis.
PARIS (S&P Global Ratings) March 25, 2020-- S&P Global Ratings today took the rating actions listed above.
A change in majority shareholder means Borealis will likely lose its status as a government-related entity (GRE) status with Abu Dhabi as well as potential credit support through Mubadala Development Company (MDC).  The CreditWatch placement follows Borealis' recent announcement that its controlling shareholder MDC has entered into a formal agreement with its minority shareholder OMV (unrated) for the sale of a 39% stake in Borealis for USD4.68 billion. Borealis is currently 64% owned by MDC and 36% owned by OMV, which is in turn 25% owned by MDC. As a result of this transaction, OMV will own 75% of Borealis, becoming the controlling shareholder. OMV would fully consolidate in its financial statements Borealis' results. This will result in Borealis losing both GRE status vis a vis the Abu Dhabi government and credit support through MDC.
Until closing, we consider Borealis to be a GRE with an important role and limited link with the Abu Dhabi government.  MDC's close links to the Abu Dhabi government lead us to consider there is a moderate likelihood that the Emirate of Abu Dhabi would provide timely and extraordinary support to Borealis in the event of a financial distress, indirectly through MDC. This is based on our view of Borealis':
  • Important role to the government, reflecting primarily Borealis' stake in Borouge, one of the government's key strategic petrochemical project, integrated with the refinery of Abu Dhabi National Oil Company (ADNOC), which holds the remaining 60% stake in Borouge. Borealis' direct presence in Abu Dhabi through Borouge, and its Borstar plastic manufacturing technology differentiates, in our view, Borealis from other MDC subsidiaries. We expect Borealis' stake in Borouge to remain unchanged given it brings technology and chemicals license to Borouge's operations, while continuing to benefit from dividends from Borouge.
  • Limited link with the government given the indirect state ownership in Borealis offering MDC representation to the board of Borealis. We expect MDC's representation in Borealis to decline substantially when OMV becomes majority owner.
We consider Borealis as moderately strategic for MDC. This assessment leads us to apply a one-notch positive adjustment to our stand-alone credit profile (SACP) on Borealis to arrive at the 'BBB+' long-term issuer credit rating. Once OMV becomes Borealis' majority shareholder, the support we factored in from MDC and indirectly from Abu Dhabi may no longer be available to Borealis if needed.
We still need to determine how OMV as controlling owner could affect Borealis' creditworthiness.  At this time, we do not have full visibility on the support that Borealis could receive from OMV, including the new controlling owner's strategic and financial policy regarding Borealis. Our initial assessment of OMV points to a satisfactory business risk profile in the context of other O&G rated peers, and an intermediate financial risk profile. OMV could be considered a GRE since the Austrian government has 31.5% ownership, but there is still uncertainty regarding the extent of the potential support to OMV from the Austrian government.
On a stand-alone basis, Borealis has headroom for potential return to mid- to down-cycle conditions in petrochemicals and polyolefins currently materializing.   We expect COVID-19 containment measures and the subsequent impact on oil prices to materially affect Borealis' operations. In our base case for 2020, we forecast stand-alone EBITDA of about €900 million. This is a dip compared with last year's €1.05 billion. We expect margins to deteriorate in a low oil price environment, although temporarily benefiting from the declining trend, and factoring in the expected increase in base chemicals capacity in 2020, notably from the U.S. and Asia. The extent of the downside still needs to be assessed with first- and second-quarter results, given the current low visibility on supply chain and logistics in Europe. We also expect Borouge's operating performance to be hit by the drop in oil prices, reflected in a much lower dividend to Borealis of about €400 million, compared with €650 million in 2019. Positively, Borealis' credit standing has been strong for the rating in recent years, benefiting from top-of-the-cycle conditions in its European petrochemical operations, supported by favorable demand, supportive oil prices, sizable dividends from Borouge. This has enabled the company to consistently report strong metrics for the rating and solid gearing against its stated financial policy. We estimate that the current weak and uncertain environment may absorb a large portion of this leeway, pointing to 2020 S&P Global Ratings-adjusted funds from operations (FFO)-to-debt ratio close to 45%, our downside threshold. We factor in that further deterioration in operating conditions could lead to stronger leverage management actions, notably on the capital expenditure (capex) front.
We anticipate Borealis' fertilizers division to show stronger resilience in the current environment. But it will only partly mitigate risks, in our view. This division represented about 15% of sales in 2019.
The negative CreditWatch reflects that we could lower the rating to 'BBB' within the next three to six months if we view ownership support to Borealis deteriorating following the stake transfer to OMV. This will depend on our review of OMV's credit profile, including its potential support from the Austrian State holding company, and strategic policy regarding Borealis. We expect to resolve the CreditWatch ahead of the transaction close.
We could also lower the rating if the COVID-19 pandemic has a more severe impact on market conditions, such that Borealis' adjusted FFO to debt deteriorated to below 45%.
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