S&p inv grade braskem_300311


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Braskem Ratings Raised To 'BBB-'
From 'BB+' On Stronger Business
And Liquidity; Outlook Stable

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S&p inv grade braskem_300311

  1. 1. March 30, 2011Research Update:Braskem Ratings Raised To BBB-From BB+ On Stronger BusinessAnd Liquidity; Outlook StablePrimary Credit Analyst:Alexandre Menezes, Sao Paulo (55) 11-3039-9741;alexandre_menezes@standardandpoors.comSecondary Contact:Reginaldo Takara, Sao Paulo (55) 11 3039-9740;reginaldo_takara@standardandpoors.comTable Of ContentsOverviewRating ActionRationaleOutlookRelated Criteria And ResearchRatings Listwww.standardandpoors.com/ratingsdirect 1 857594 | 301540011
  2. 2. Research Update:Braskem Ratings Raised To BBB- From BB+On Stronger Business And Liquidity; OutlookStableOverview• Braskem has integrated Quattor faster than we expected, which is allowing it to improve credit metrics.• We expect Braskems improved business profile to allow it to report higher and more resilient profitability.• We are raising the global scale corporate credit rating on Braskem to BBB- from BB+ and the Brazil national scale rating to brAAA from brAA+.• The stable outlook reflects our expectation that Braskem will continue deleveraging in 2011 while sustaining strong liquidity and further capturing synergies from Quattor.Rating ActionOn March 30, 2011, Standard & Poors Ratings Services raised its corporatecredit rating on Brazil-based petrochemical company Braskem S.A. to BBB-from BB+. At the same time, we raised our Brazil national scale ratings onBraskem to brAAA from brAA+. The outlook is stable.RationaleThe upgrade reflects Braskems improving cash flow metrics and liquidity, aswell as our expectations that the company will report higher and moreresilient credit metrics in the future because of its dominant market positionin Brazil, a diversified feedstock mix, favorable supply contracts, andoperating synergies with acquired Quattor. Braskem has delivered operating andfinancial improvements ahead of our expectations because of its successfulintegration of Quattors assets. We believe these factors allow Braskem tostrengthen credit metrics and maintain an intermediate financial profile thatis compatible with the rating. Despite positive market fundamentals in theintermediate term, Braskem remains exposed to industry cyclicality, the effectof market and economic conditions on demand for petrochemical products, andsome margin fluctuation due to volatile raw material and product prices--evenmore so with the currently volatile oil price environment.We have also revised our analytical approach and will cease treating Braskemas a government-related entity (GRE), given that we assess its importance androle as limited and the Brazilian government doesnt directly own Braskem, butowns it through Petroleo Brasileiro S.A. (Petrobras: BBB-/Stable/--). Still,our analysis encompasses the relationship between Braskem and Petrobras, bothStandard & Poor’s | RatingsDirect on the Global Credit Portal | March 30, 2011 2 857594 | 301540011
  3. 3. Research Update: Braskem Ratings Raised To BBB- From BB+ On Stronger Business And Liquidity; Outlook Stablecommercial and as a shareholder, under our parent-subsidiary criteria.Braskems business profile is satisfactory. Although it competes with imports,the company benefits from a dominant position in the Brazilian petrochemicalmarket as the sole local producer of polyethylenes and polypropylene in thecountry and a leading player in polyvinyl chloride. Its favorable feedstockcontracts, close commercial relationships with its fragmented customer base,and strong distribution capabilities allow Braskem to sell products at a goodprofitability, a condition that further improved with the Quattor acquisition.Braskems ability to report sound and more stable margins is evidence of itsimproved business position.Additionally, as it is ramping up utilization rates at Quattor and capturingsynergies stemming from full integration of its assets, Braskemsprofitability is becoming more resilient. A more-balanced feedstock mix(between naphtha, ethane, and refinery propylene), even more flexibility toefficiently plan production at its several plants, economies of scope andscale, and other operating synergies also bode well for Braskems performancein the intermediate term. Finally, we expect market conditions to remainfavorable in the next couple of years as we project demand to remain firm inBrazil and global petrochemical prices should remain consistent with limitedsupply expansion.The financial profile is significant. We expect Braskem to sustain a moreprudent financial policy in the next years, with stronger liquidity and lowerleverage than historically. The company has improved credits metrics becauseof stronger cash flows and by reducing on-balance-sheet debt in 2010, and ouranalysis assumes further debt reduction in 2011 and beyond. Adjusted totaldebt to EBITDA strengthened to 3.8x in December 2010 from 5.0x one yearearlier, but funds from operations (FFO) to total adjusted debt remainedsomewhat weak at 13.5% in December 2010. We expect this ratio to improve to25%-30% (which we view as more commensurate with the rating) from 2012 on aswe project Braskem to further expand cash flows in 2011 with favorable marketconditions and fully take advantage of synergies with Quattor.LiquidityBraskems liquidity is strong. In December 2010, the company reported cashreserves of Brazilian reais (R$) 2.6 billion compared with short-term debt ofR$1.7 billion. We project strong FFO for the next couple of years. In our basecase, we assume Braskem will finance capital expenditures and roll over somebank debt but still reduce total debt with strong free operating cash flow(FOCF). Capital expenditures are manageable, even if we included a jointventure for a greenfield project finance in Mexico. We also project Braskem tomanage working capital efficiently, resulting in low financing needs in theintermediate term. Braskem also counts on a stand-by credit facility of $350million, which is fully available. Covenant headroom is adequate and based onnet debt ratios.www.standardandpoors.com/ratingsdirect 3 857594 | 301540011
  4. 4. Research Update: Braskem Ratings Raised To BBB- From BB+ On Stronger Business And Liquidity; Outlook StableOutlookThe stable outlook reflects our expectations that operating results will keepimproving as Braskem captures synergies out of acquired assets and favorablemarket conditions allow for revenue and cash flow expansion. We project FFO tototal debt and debt to EBITDA to reach 20%-25% and 3.0x, respectively, byyear-end 2011 and 25%-30% and 2.5x, respectively, by 2012. We could lower theratings if Braskems liquidity weakens or if it diverges from expectedfinancial improvement, with adjusted total debt to EBITDA above 3.0x and FFOto adjusted total debt below 20%. Given that the ratings already factor creditmetric improvements, we believe a positive rating revision is unlikely in theintermediate term but would be warranted if Braskem further improves itsfinancial profile, with FFO to total debt consistently above 40%.Related Criteria And Research• Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010• Key Credit Factors: Business And Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008• 2008 Corporate Criteria: Analytical Methodology: April 15, 2008Ratings ListUpgraded To FromBraskem S.A. Corporate Credit Rating Global Scale BBB-/Stable/-- BB+/Stable/-- National Scale brAAA/Stable/-- brAA+/Stable/-- Senior Unsecured Global Scale BBB- BB+ National Scale brAAA brAA+Braskem Finance Ltd. Senior Unsecured BBB- BB+Braskem International Ltd. Senior Unsecured BBB- BB+Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at www.globalcreditportal.com. All ratings affectedby this rating action can be found on Standard & Poors public Web site atwww.standardandpoors.com. Use the Ratings search box located in the leftcolumn.Standard & Poor’s | RatingsDirect on the Global Credit Portal | March 30, 2011 4 857594 | 301540011
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