BASF SE 'A/A-1' Ratings Placed On CreditWatch Negative Due To COVID-19 Impact

  • We expect the COVID-19 pandemic to significantly affect the macroeconomic environment, industrial production, and chemicals demand in 2020.
  • We view BASF SE's rating headroom as very limited following a weak second-half 2019, reflecting declining chemicals margins and weak auto markets, which are expected to deteriorate further.
  • We expect S&P Global Ratings-adjusted funds from operations (FFO) to debt to reach about 30%, after about 27.5% in 2019, versus the 35% viewed as commensurate with the rating.
  • We are therefore placing our 'A/A-1' ratings on BASF on CreditWatch with negative implications, reflecting the possibility of a one-notch downgrade due to the effects of COVID-19, which will potentially impair leverage management actions.
PARIS (S&P Global Ratings) March 25, 2020-- S&P Global Ratings today took the rating actions listed above.
The COVID-19 pandemic has significantly lowered our macroeconomic expectations for 2020.  The CreditWatch placement reflects a one-in-two probability that we will lower our rating on BASF. This is due to the significant implications of the COVID-19 pandemic on the world economy, including industrial production stoppages and supply chain issues, especially for cross-border sectors such as chemicals. At this stage, our base-case scenario is for relatively short-term effects from the pandemic on economies, which could be followed by a progressive recovery in second-half 2020 and thereafter. However, we do not rule out the possibility of a longer-than-expected downturn, involving further lock-down measures and political restrictions on economic activity, or additional effects on the financial world. Given BASF's high credit standing, we do not expect it to be directly affected by current tensions in debt and equity capital markets. In our latest 2020 macroeconomic base case, we forecast a marked recession in Europe (negative 0.5% to 1% growth), the U.S. (0% to negative 0.5%), and a material slowdown in China (2.7%-3.2%).
Our 2020 base case for BASF is markedly down and incorporates very significant uncertainty.  In our current base-case operating scenario for BASF, we factor in slightly under €4 billion EBIT before special items. Company guidance stands at €4.2 billion-€4.8 billion since Feb. 28, 2020. We estimate that the COVID-19 situation has materially deteriorated since then, with the rapid spread of the virus in Europe and the U.S. We estimate that demand from industrial and manufacturing sectors will be significantly affected, notably from auto makers, with some announcing production stoppages. In turn, our most recent estimate is for a 15%-20% decline in European and U.S. light vehicle sales in 2020. Besides, we continue to estimate that cracker margins will trend down over the medium term, even factoring in the drop in oil prices, reflecting planned increases in base chemicals capacities--notably in the U.S. and Asia--in 2020. We expect chemicals margins will be significantly down at the end of first-quarter 2020 and into the second quarter, only partly mitigated by relative agribusiness stability in the first three months of the year. The extent of the downturn for BASF will be largely dependent on the timing and profile of the recovery in industrial production after the pandemic peaks, which is highly uncertain at this stage.
Capital expenditure (capex), working capital control, as well as portfolio management, could mitigate a deterioration in leverage.   The cost-savings program is well under way and we believe it should provide €1 billion-€1.5 billion of EBITDA on a gross basis. We expect the company to downsize investments in the current environment, potentially with some delay in its most significant growth projects, which could result in €200 million-€300 million lower capex than the €3.4 billion guided by the company for 2020. We expect working capital needs to reduce in the weaker operating environment and lower price levels, although this follows a very strong fourth-quarter 2019 on the working capital side (€1.4 billion release). Moreover, in our base case we do factor in the proceeds from the disposals of the construction chemicals business to private-equity firm Lonestar (closing targeted in third-quarter 2020) and the pigments business to DIC Corporation (closing targeted fourth-quarter 2020).
We now assume about 30% adjusted FFO to debt at year-end 2020, because recovery prospects are fading following the weak landing in 2019.  This follows our previous forecast of 35%-40% and compares with the 35% seen as commensurate with the rating. Adjusted FFO to debt was also only 27.5% in 2019 versus our previous forecast of 28%-30%. The CreditWatch placement balances the likelihood of an initial public offering (IPO) for a portion of BASF's stake in oil and gas joint venture Wintershall Dea in second-half 2020, subject to market conditions. However, this is not part of our base case, given current adverse equity market conditions, volatile oil prices, and uncertainty over valuation and proceeds. Nevertheless, we estimate that a first step IPO could affect FFO to debt in the order of 500 basis points (bps)-700 bps.
The CreditWatch negative reflects that we could downgrade BASF by one notch in the next three-to-six months, depending on the length and extent of COVID-19 containment measures and the significant slowdown in the global economy. We expect the company to prudently manage costs and investments to limit the leverage effects, and we do not rule out a potential IPO of Wintershall Dea, which could return ratios to a ratings-commensurate level.
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