LafargeHolcim 'BBB/A-2' Ratings Affirmed On Sustained Deleveraging And Ratings Headroom; Outlook Stable

  • We forecast that the credit metrics of Switzerland-headquartered building materials manufacturer LafargeHolcim Ltd. will remain resilient in 2020-2021, notwithstanding our forecast of a low-double-digit decline in like-for like revenues in 2020 due to the global recession resulting from the coronavirus pandemic.
  • Thanks to LafargeHolcim's strong operating performance in 2019, the company already has reasonable rating headroom, with S&P Global Ratings-adjusted funds from operations (FFO) to debt of more than 36% in 2019, compared to the 30% that we view as commensurate with the ratings.
  • We anticipate that this headroom will assist LafargeHolcim in maintaining its credit quality in 2020, with further support from the net proceeds from the disposal of Holcim Philippines. As such, we forecast adjusted FFO to debt of about 30% at year-end 2020 and 35%-40% in 2021.
  • We are therefore affirming our 'BBB/A-2' long- and short-term issuer credit ratings on LafargeHolcim.
  • The stable outlook reflects our view LafargeHolcim is well equipped from a credit perspective to withstand the challenging macroeconomic environment caused by the coronavirus pandemic.
LONDON (S&P Global Ratings) March 27, 2020-- S&P Global Ratings today took the rating actions listed above.
LafargeHolcim has sufficiently strong ratings headroom and liquidity to counter the effects of the coronavirus pandemic.   In our view, the company ended 2019 in a strong financial position, with Swiss franc (CHF) 3.5 billion of unrestricted cash balances and CHF5.8 billion of availability under committed credit lines, against only CHF1.8 billion of contractual debt maturities in 2020. We assume that the cash balances may be bolstered further by net proceeds of about $1.8 billion (about CHF1.8 billion) from the disposal of Holcim Philippines, which we understand is in the final stages of regulatory approvals.
In addition, LafargeHolcim achieved strong credit metrics at the end of 2019, with S&P Global Ratings-adjusted funds from operations (FFO) to debt of more than 36%, compared to the 30% that we view as commensurate with the ratings. This, together with LafargeHolcim's strong liquidity position, leads us to believe that the company is well equipped from a credit perspective to withstand the challenging macroeconomic environment caused by the coronavirus pandemic.
Assuming the disposal of Holcim Philippines, we forecast that LafargeHolcim's adjusted FFO to debt will be stable at about 30% at 2020 year-end. Our forecast factors in a low-double-digit decline in like-for-like revenues, although the effect of the pandemic is difficult to quantify at this stage due to its uncertain duration.
We also assume that LafargeHolcim's adjusted EBITDA margin could decline to about 20.0% in 2020 from 22.7% in 2019, reflecting the company's significant fixed-cost base and the volume loss concurrent with the coronavirus pandemic. At the same time, we understand that management is taking proactive measures and reviewing all spending to mitigate the impact of the pandemic.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers (see our macroeconomic and credit updates here: As the situation evolves, we will update our assumptions and estimates accordingly.
LafargeHolcim's prudent financial policy demonstrates its commitment to a higher rating.   This financial policy is evident from measures such as:
  • LafargeHolcim's cancellation of its share-buyback program in early March 2018;
  • The introduction of a scrip dividend allowing for greater flexibility in shareholder remuneration in 2019;
  • The use of proceeds from the sale of shares in Asian subsidiaries for debt reduction in 2019 and optimization of the debt maturity profile; and
  • The issuance of hybrid capital instruments in 2018-2019.
While over the longer term, we anticipate that LafargeHolcim will continue to pursue targeted bolt-on acquisitions, we anticipate that it will remain highly disciplined in its discretionary spending in order to protect its credit metrics and liquidity in 2020. As the company demonstrated in 2019, it has important ways of controlling leverage, including the flexibility to reduce shareholder remuneration, bolt-on acquisitions, and growth capital expenditure (capex).
LafargeHolcim's adjusted FFO-to-debt ratio stood at 36.3% at year-end 2019, up from 22% at year-end 2018, and well above the 30% that we view as commensurate with the rating.   LafargeHolcim delivered a solid operating performance in 2019. Its adjusted EBITDA increased by 8% to CHF6.1 billion on a 22.7% margin, up from CHF5.6 billion and 20.4% margin in 2018. The growth in EBITDA was over-proportional compared to a 3.1% increase in like-for-like net sales in 2019 (excluding exchange-rate fluctuations and the effects of divestments in Indonesia, Malaysia, and Singapore).
LafargeHolcim's profitability was boosted by its price-over-cost strategy, as well as its strict focus on selling, general, and administrative (SG&A) expenses. The latter resulted in CHF421 million in net savings at 2017's exchange rates and business scope through a comprehensive program that ran during 2018-2019. At the same time, consistent deleveraging over the course of 2018-2019 by way of proactive refinancing and gross debt reduction reduced debt-servicing costs.
The combination of higher profitability, lower interest costs, and an ongoing focus on working capital management led to a notable improvement in LafargeHolcim's cash conversion ratio (defined by management as free cash flow before IFRS 16 to recurring EBITDA). This ratio rose to 49.5% in 2019 from 28.3% in 2018, well above the target of 40% as defined in the company's 2022 strategy. We view LafargeHolcim's strong financial position at the end of 2019 as supportive in weathering the effects of the coronavirus pandemic in 2020.
The stable outlook reflects our view that LafargeHolcim is well equipped from a credit perspective to withstand the challenging macroeconomic environment caused by the coronavirus pandemic. This factors in the company's strong liquidity position and our forecast of FFO to debt of about 30% in 2020.
We could raise the rating if LafargeHolcim's adjusted FFO-to-debt ratio remains comfortably above 30% over the next 12-18 months, for example if it maintains its focus on cost control and working capital management. This approach, in our view, will be particularly important in mitigating the effect of the coronavirus pandemic and the resulting global recession we foresee in 2020. A further demonstration of a prudent financial policy, especially in 2020, will be important in our upgrade considerations.
We understand that management is committed to maintaining ratios consistent with a 'BBB+' long-term issuer credit rating.
We do not anticipate lowering the rating on LafargeHolcim, given its considerable rating headroom. However, we could revise the outlook to negative if LafargeHolcim's profitability and cash flow generation proved less resilient to the recession than we anticipate. We believe this could happen if the coronavirus pandemic extended beyond 2020, leading to a more significant and prolonged contraction in revenues, concurrent with a sustained decline in the company's adjusted EBITDA margin to below 20%. Rating headroom could be significantly reduced if the disposal of Holcim Philippines did not materialize.

A revision of the outlook to negative could also occur if LafargeHolcim deviated from its conservative financial policy, for example by pursuing large, debt-financed acquisitions or shareholder remuneration that would compromise its credit metrics.
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