Credit Opinion: Braskem SA

Transcription

1 Credit Opinion: Braskem SA Global Credit Research - 20 Aug 2015 Sao Paulo, Brazil Ratings Category Braskem Finance Ltd Outlook Bkd Senior Unsecured Braskem America Finance Company Outlook Bkd Senior Unsecured Moody's Rating Negative Baa3 Negative Baa3 Contacts Analyst Phone Barbara Mattos, CFA/Sao Paulo John Rogers/New York City Marianna Waltz, CFA/Sao Paulo Key Indicators [1]Braskem SA (GAAP) 6/30/2015(L) 12/31/ /31/ /31/ /31/2011 Revenues (USD Billion) $17.0 $19.6 $19.1 $18.6 $19.5 PP&E (net) (USD Billion) $9.8 $10.7 $10.6 $10.3 $11.1 EBITDA Margin % 16.5% 12.6% 12.9% 9.5% 11.8% ROA - EBIT / Average Assets 11.0% 7.6% 7.2% 3.7% 5.7% Debt / EBITDA 4.7x 5.2x 5.0x 5.9x 4.7x EBITDA / Interest Expense 3.2x 2.7x 3.2x 2.8x 3.1x Retained Cash Flow / Debt 14.9% 9.8% 10.9% 9.1% 10.5% [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - Largest producer of thermoplastic resins in the Americas, with a dominant market position in Brazil supported by longstanding relationship with clients - Commodity-based company, feedstock price exposed to volatility of international market - Diversification of raw-material sources through investments in gas-based projects should benefit operating margins in the long run

2 - Uncertainties regarding renewal of naphtha supply contract with Petrobras - Macroeconomic and political uncertainties in Brazil bring additional risks to operating performance Issuer Profile Braskem S.A. (Braskem) is the largest producer of thermoplastic resins (Polyethylene, Polypropylene and Polyvinyl chloride) in the Americas, with annual production capacity of 7.7 million tons. Braskem also produces caustic soda, chlorine and basic petrochemicals as ethylene, propylene, gasoline, among others. In the LTM ended June 2015, Braskem reported consolidated net revenues of BRL 45.1 billion (USD 17 billion converted by the average exchange rate for the period). SUMMARY RATING RATIONALE Braskem's Baa3 rating is supported by its size as the largest petrochemical company in Brazil and in the Americas by production capacity of resins, with historically above industry average operating margins coming from high capacity utilization rates, long-term client relationships, and product customization. The rating also reflects the company's dominant market position in Brazil and the geographic diversification with operations in the USA and Europe. Geographic diversity should improve even further as the company pursues international projects, including greenfield plants in Latin American countries, as the Mexican Ethylene XXI project, which will also support further feedstock diversification into natural gas. Challenges for the company's credit metrics include the timid economic growth in the Brazilian domestic market and the competition from imported products, which somewhat limit volume growth and margin expansion. The rating also factors in the company's exposure to naphtha and gas prices and its dependence on Petroleo Brasileiro S.A. - Petrobras (Ba2 stable) for the supply of those inputs. The renegotiation of the naphtha supply agreement with Petrobras also brings uncertainties and further risk to margins. An additional risk to the company would arise in case of a negative outcome from the investigation under "Car-Wash" with respect to the alleged benefits for Braskem in contracts with Petrobras. DETAILED RATING CONSIDERATIONS STRONG MARKET POSITION ENHANCED THROUGH ACQUISITIONS Braskem is the only producer of polyethylene and polypropylene in Brazil, having a market share of nearly 70% in polymers (PE, PP and PVC) as of June Following the acquisitions of Sunoco Chemical's and Dow's polypropylene assets (USA and Europe business Unit), Braskem became the largest producer of PP in the Americas and the 7th largest producer of polymers worldwide. The company's market share, combined with the lack of a sophisticated logistics and distribution system for resins in Brazil, provides it with significant advantages in the domestic market. COMMODITY NATURE OF BUSINESS AND HIGH DEPENDENCY ON BRAZILIAN ECONOMY Operating in a highly cyclical industry, Braskem has generated about 55% of its revenues in Brazil in the last twelve months ended June Although geographic concentration and exposure to the ups and downs of the Brazilian economy are constraining factors to Braskem's rating, we note that domestic sales of resins ensure significantly higher margins than exports. Prices charged to local clients incorporate service and customization fees, import costs, such as freight and insurance expenses, and import duties. Braskem's revenues are directly tied to commodity products with volatile prices pegged to the US dollar, conducive to unstable margins and cash flows. With about 100% of revenues, 80% of total costs and 81% of its total debt (including the debt related to the project in Mexico) pegged to the US dollar, the company has large exposure to foreign exchange movements. A forex depreciation increases debt levels in the short term, but in the long run benefits Braskem's business model. Conversely, a brisk appreciation of the local currency, as witnessed during 2011, encourages imports and negatively affects domestic spreads and revenues when translated into local currency. In our view, Braskem's improved geographic and feedstock diversification should help mitigate this operating margin volatility that arises from foreign exchange risk. In addition, Braskem's sales outside of Brazil are directed to a variety of countries in Europe, Asia, North America and Latin America. In the last twelve months ended June 2015, Braskem has generated about 45% of its revenues from sales abroad, including exports from Brazil. Although we expect Braskem's internationalization will continue to enhance the company's external revenues, we believe Brazil will continue to be Braskem's largest cash flow contributor given its dominant market presence and historical high spreads. A continued deterioration in Brazil's

3 economic growth could reduce Braskem's ability to sustain credit metrics. Braskem has ambitious growth plans that include projects in Brazil as well as in other countries in Latin America. However, reflective of a weakened macroeconomic scenario, Braskem has put most of its expansion projects on hold, except for its Ethylene XXI project in Mexico. The project in Mexico is a 75%/25% joint-venture with Grupo Idesa of Mexico to construct a USD 5.2 billion ethane-based cracker integrated with three polyethylene facilities with total capacity of approximately one million tons per year, to start up during the fourth quarter of The project is largely designed to meet local demand in Mexico, a net importer of PE. Feedstock will be supplied under long term contract with Pemex Gas y Petroquimica Basica, a subsidiary of Petroleos Mexicanos (PEMEX, A3 stable), and supportive of attractive margins. Gas prices will be indexed according to US Mont Belvieu Gas with a discount. Braskem's rating assumes that the Mexican Ethylene XXI project is the only relevant investment Braskem is committed to at the moment. The current Baa3 rating considers our expectation that Braskem will prudently manage its future investments in order to maintain adequate leverage metrics and liquidity. DEPENDENCY ON PETROBRAS FOR FEEDSTOCK Currently about 50% of Braskem's overall production costs are related to naphtha, which has volatile pricing directly linked to oil. Braskem's operating margins are therefore highly dependent on its ability to pass through incremental production costs to its clients. About 70% of Braskem's naphtha requirements are supplied by Petrobras. The remaining needs are covered with imports from Algeria, Venezuela and other countries based on annual supply agreements and spot prices. Because it is based on the moving average of the past three months' naphtha price, the contract with Petrobras helps Braskem to reduce the volatility of its margins and cash flows and to benefit from productivity gains from an improved naphtha-resins conversion rate. Also, Petrobras is the only natural gas liquids supplier to the Riopol cracker in Rio de Janeiro and Braskem Qpar in São Paulo, currently Braskem's gas-based crackers in Brazil. The acquisition of Quattor in 2010 (including the Riopol ethane/propane cracker) and the start-up of Braskem's green polyethylene (from ethanol) plant have helped somewhat in diversifying the feedstock supply away from naphtha. We anticipate further feedstock diversification over the medium to long term as the ethylene project in Mexico is completed. When the Ethylene XXI project in Mexico is concluded, naphtha-based feedstock will decline to about 63% from 72% of Braskem's production capacity. Additionally, given substantially lower feedstock costs in North America, Braskem may need to modify the pricing in this contract to bolster its competitive position in the Americas. While we recognize that Petrobras has a good track record of reliably supplying naphtha to Braskem, the large concentration in one supplier poses risk. This is evidenced by the fact that the existing supply contract expired in March 2014, and a new contract is still under discussion. The contract has already been extended three times for 6-month periods, and the next deadline is August 31,2015. The Federal Prosecution Office in Brazil, in connection with the "Car Wash" investigations against third parties, has alleged that the naphtha contract signed in 2009 has caused losses to Petrobras. With respect to such alleged losses, Braskem filed a petition with the Federal Police stating that the contract has been fairly negotiated and reflects market dynamics. Also, Petrobras stated that, under the assumptions taken into consideration when the contract was established, there would be no losses to the company. In case there is a negative outcome from the investigations related to these alleged benefits for Braskem in contracts with Petrobras under the "Car Wash" context, or Braskem and Petrobras are not able to reach a final long-term naphtha supply contract, these would be negative considerations for the ratings. CREDIT METRICS STILL CHALLENGED DESPITE ADEQUATE LIQUIDITY POSITION AND PRUDENT FINANCIAL POLICY Braskem publically documents its financial guidelines in its shareholders' agreement and financial management policy, including liquidity, leverage, hedging and dividend policies. A large portion of Braskem's indebtedness - 81%, including the debt related to the project in Mexico - is denominated in US dollars and naturally hedged by its USD-denominated cash flow as well as traditional derivative instruments. The total debt derives from the acquisitions that consolidated the Brazilian petrochemical industry, in addition to debt assumed in greenfield projects, including the recent disbursements of the project finance debt raised to fund the Mexican Ethylene project (total of USD 3.2 billion at the end of June 2015), consolidated in its financial statements. In the last twelve months ended June 2015, Braskem's Total Adjusted Debt to EBITDA of 4.7x (including FIDC, derivatives, pension obligations and the limited recourse project finance debt in Mexico) was high for the rating

4 category. Without the Project Finance in Mexico, Braskem's Total Adjusted Debt to EBITDA declines to 3.4x. As per the significant capital expenditures underway, the greenfield project in Mexico is funded under a project finance structure, with of debt of USD 3.2 billion and the remaining USD 2.0 billion of equity contribution, and Braskem's commitment towards the project is limited to its 75% equity share and contractual obligations. As part of its commitment to maintaining strong liquidity, Braskem has current cut back any additional greenfield investments for growth. With regards to the debt accounting in the case of the ethylene plant in Mexico, Moody's recognizes the non-recourse nature of the project finance debt and its low probability of delinquency given its competitive advantages and expected high profitability. Nevertheless, we consider the full debt impact in our leverage calculations as it is consolidated in Braskem's financial statements, and we also believe that Braskem would be compelled to assume financials obligations of the project (limited to its participation and contractual obligations) in case of need, due to its strategic importance for the company. On a consolidated basis, Braskem's relatively high capital spending requirements related to the greenfield Ethylene project in Mexico, which total investment amounts to close to USD 5.2 billion (including working capital needs, reserve accounts and interest and fees from the Project Finance Debt during construction), as well as the company's sustaining capex has resulted in negative free cash flow. Meanwhile, Braskem's sound liquidity should provide the company the financial flexibility necessary to ride through industry downturns and challenges in the domestic market. At the end of June 2015, Braskem had BRL 4.6 billion in cash and about BRL 2.8 billion in committed credit facilities fully available, besides the expected ongoing access to lending from domestic and international banks. It also has a large volume of unencumbered exports available to back export securitization programs, representing a comfortable liquidity cushion in the face of potential liquidity shortfalls arising from lower international resin prices. Also, Braskem has been able to sell part of its domestic trade receivables, to investment funds (FIDC, BRL 1.4 billion outstanding in June 2015) based on the historically low delinquency of its clients. These are committed to be available on a revolving basis until Other Considerations OWNERSHIP AND CORPORATE GOVERNANCE Braskem is a listed company with shares traded on the BM&F Bovespa, NYSE and Latibex. Braskem has 50.1% of its outstanding voting shares (representing 38.3% of the outstanding total shares) held directly and indirectly by Odebrecht S.A. (unrated), the family-owned holding company of one of the largest conglomerates in Brazil. Petrobras is Braskem's second largest shareholder with 47.0% of its voting shares and 36.1% of its total shares. Six out of eleven board members of Braskem (including the chairman) are elected by the controlling shareholder The remaining board members are elected by Petrobras (four) and BNDES (one). While Braskem's CEO and CFO are nominated by Odebrecht, one executive director (Investments) is appointed by Petrobras. The relationship between Odebrecht and Petrobras is governed by a shareholders' agreement valid until Braskem is in full compliance with the corporate governance rules established by the NYSE for foreign corporates listed on the exchange, which include the implementation of a Code of Conduct and a permanent fiscal council (Odebrecht appoints three members out of five). In addition the company is listed in the Spanish stock exchange for Latin American companies (Latibex). Moody's regards Braskem's sound financial policies as credit positive. Its financial policies determine the maintenance of US denominated cash sufficient to cover the next six months of operational cash generation and one year of US debt maturities and a balance of at least 50% of its total debt in US dollars. As part of its capital structure management, Braskem has a target net leverage of 2.5 times and maintains minimum cash sufficient to cover short-term debt and working capital needs, committed capex without funding, period taxes and derivatives MTM, mitigating refinancing risks. Lastly, all financial policies are written and publicly available at Braskem's website, and the company has the financial flexibility to reduce dividend payments when needed. We expect the company to continue to prudently manage dividends distribution in order to prioritize balance-sheet deleveraging and to maintain adequate liquidity. Rating Outlook The negative outlook reflects Moody's expectation that Braskem's metrics will remain pressured in the medium term owing to modest growth in key developed markets and weak domestic economic growth in Brazil and the uncertainties surrounding the naphtha-supply contract with Petrobras. Our expectations of weak credit indicators, namely leverage and free cash flow metrics, during the investments in its greenfield ethylene plant in Mexico (75% equity participation) are also incorporated in the negative outlook. A stabilization of the outlook would require Braskem's profitability to return to its historical levels on a sustainable basis while adjusted leverage gradually

5 decreases. A final agreement with Petrobras for the naphtha contract and an outcome that does not imply a significant cost increase for Braskem is also a necessary condition for the stabilization of the outlook. What Could Change the Rating - Up A rating upgrade is unlikely over the next few years given the current credit metrics. Longer term, the rating could be upgraded if leverage decreases to a level which Moody's considers to be more compatible with the volatile nature of Braskem's cash flows, with Total Adjusted Debt to EBITDA stabilizing at around 2.5x. An upgrade would also require that Braskem maintain strong liquidity and Retained Cash Flow (defined as Funds from Operations less Dividends) to Debt above 25%. What Could Change the Rating - Down Negative pressure on the rating could result from weaker operating results or from persistently high leverage, with Total Adjusted Debt/ EBITDA of 3.5x or above and Retained Cash Flow/Total Adjusted Debt lower than 15%. Furthermore, the rating could be negatively affected if Braskem assumes substantial risks related to greenfield projects (debt or completion guarantees, etc) or if the level of consolidated secured debt materially increases. Further developments of the "Car Wash" investigations that could impose financial penalties to the company or impair its operations could also prompt negative rating actions. Rating Factors Braskem SA (GAAP) Chemical Industry Grid [1][2] Current LTM [3]Moody's Month Forward ViewAs 6/30/2015 of 8/20/2015 Factor 1 : Scale (20%) Measure Score Measure Score a) Revenues (USD Billion) $17.0 A $15 - $50 A b) PP&E (net) (USD Billion) $9.8 A $8 - $20 A Factor 2 : Business Profile (20%) a) Business Profile Baa Baa Baa Baa Factor 3 : Profitability (10%) a) EBITDA Margin % 16.5% Baa 15% - 25% Baa b) ROA - EBIT / Average Assets 11.0% Baa 9% - 13% Baa Factor 4 : Leverage & Coverage (30%) a) Debt / EBITDA 4.7x B 4x - 6x B b) EBITDA / Interest 3.2x Ba 2x - 8x Ba Expense c) Retained Cash Flow / Debt 14.9% Ba 10% - 20% Ba Factor 5 : Financial Policy (20%) a) Financial Policy Ba Ba Ba Ba Rating: a) Indicated Rating from Grid Baa3 Baa3 Baa3 Baa3 b) Actual Rating Assigned Baa3 Baa3 Baa3 Baa3 [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. [2] As of 6/30/2015(L); Source: Moody's Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.

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