Dutch Chemicals Producer DSM’s Liquidity Is Now Strong; 'A-/A-2' Ratings Affirmed; Outlook Stable

We expect that Koninklijke DSM N.V.'s (DSM's) sources to uses of cash will exceed 1.52x for the next 24 months, but be below our 2.0x threshold for an exceptional liquidity profile.
  • We are therefore revising our assessment of DSM's liquidity to strong from exceptional and affirming our 'A-/A-2' long- and short-term ratings on DSM and its debt.
  • The stable outlook reflects our view that DSM will report resilient operating performance in the coming years, mainly in the nutrition segment, benefiting from cost efficiencies, working capital management, and innovation, and maintain adjusted funds from operations (FFO) to debt of 45%-50%, which we consider commensurate with the rating.
FRANKFURT (S&P Global Ratings) March 25, 2020-- S&P Global Ratings today took the rating actions listed above.
DSM's liquidity ratio is no longer in line with an exceptional assessment.
We revised our assessment of DSM's liquidity to strong from exceptional because we now expect the company's sources of liquidity will cover its uses by more than 1.5x but less than 2.0x over the next 24 months. This factors in the cash payment for the Glycom acquisition (enterprise value of €765 million) and means that the liquidity ratio is no longer in line with the threshold for an exceptional assessment. DSM's debt documentation does not include any financial covenants, which we still view as positive. In addition, we note DSM's strong standing in capital markets, as illustrated by the favorable terms of its various debt issuances. The revision of our liquidity assessment has no impact on our ratings on the company or its debt.
The stable outlook reflects our view that DSM will report resilient operating performance in the coming years, benefiting from its high exposure to the nutrition and health markets and its focus on cost efficiencies, working capital management, and innovation. We consider a ratio of S&P Global Ratings-adjusted FFO to debt of 35%-40% as commensurate with the 'A-' rating and believe that the company has some rating headroom, even after factoring in the recent Glycom acquisition and impact from the COVID-19 pandemic and anticipated recessionary environment on parts of DSM's businesses, supplying end markets such as the automotive industry. .
We could lower the rating if DSM's FFO to debt declined below 35%, for example if the nutrition segment's margins weakened as a result of increased competition, or if the benefits of its operational efficiency program were not sustainable. Similarly, a weaker financial policy commitment, demonstrated, for example, by a combination of higher-than-anticipated acquisitions, dividends, or share buybacks, could also prompt a negative rating action.
We could raise the rating on DSM provided that we were confident that the company could sustain an adjusted FFO-to-debt ratio above 45%, a level we view as commensurate with an 'A' rating. We would take this action if we were confident that DSM would maintain an appropriate balance between potential acquisitions, dividends, and share buybacks, such that the FFO-to-debt ratio was maintained, and if management committed to stronger credit metrics.
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