Fitch affirms BBB rating for Braskem's IDR, AA+ national scale rating; outlook revised to negative from stable, driven by concern about Braskem's ability to lower its elevated leverage levels amid poor outlook of petrochemical spread with naphtha prices

Andrew Rogers

RIO DE JANEIRO , October 26, 2012 (press release) – Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of Braskem S.A. (Braskem) and its subsidiaries at 'BBB-', as well as its 'AA+ (bra)' national scale rating. Fitch has revised the Rating Outlook to Negative from Stable. A full list of rating actions follows at the end of this release.

The Negative Rating Outlook reflects Fitch's concern about Braskem's ability to lower its elevated leverage levels, given the poor outlook of the petrochemical spread with naphta prices. Additional challenges for the company are to recover its market-share while implementing price increases. A downgrade is likely if the company's net leverage continues to exceed 3.0x in 2013.

Braskem's investment grade ratings reflect its leading position in the Latin American petrochemical sector, as the sole thermoplastic resin producer in Brazil. Further factored into the company's ratings are its strong liquidity position and manageable debt schedule amortization profile. Grupo Odebrecht and Petroleo Brasileiro S.A (Petrobras; local and foreign currency IDR of 'BBB', Stable Outlook by Fitch) ownership stakes in Braskem of 38.3% and 35.8%, respectively, are also positive for the ratings.

Robust Business Position Has Not Offset Its High Production Costs

The recently soaring naphta costs amid increasing oil prices has narrowed petrochemical spreads and eroded Braskem's profitability. The company's exposure to naphta prices, which represents 72% of Braskem total feedstock, positioned it as high cost producer. During 2011 and the latest 12 months (LTM) period ended June 30, 2012, Braskem's naphta prices in Brazilian reais increased by 19% and 12%, respectively. Braskem has not been able to pass through cost increases due to fierce competition from imports, despite having a market position in Brazil of almost 100% in thermoplastic resins production and about 71% of the domestic sales market. Initiatives by the Brazil government to support the competitiveness of the local industry should help the company in the future. These measures include the termination of tax incentives that states were giving to imported products, as well as an increase in import tariffs for several products, including the polyethylene, to 20% from 14%.

Challenging Scenario Halts Operating Cash Flow Recovery

The scenario of decreasing petrochemical spread, foreign exchange strengthening, weak local demand, and stiff competition from imports significantly limited Braskem's operating cash flow generation in 2011 and in 2012. Braskem generated BRL1.3 billion in funds from operations (FFO) and BRL3.7 billion in EBITDA in 2011, compared to BRL2.8 billion and BRL4.1 billion in 2010, respectively. During the LTM ended June 30, 2012, Braskem's FFO was BRL738 million and its EBITDA was BRL3.3 billion. As a consequence of the aforementioned factors, Braskem's EBITDA margin fell to 9.5% during the LTM and 11.3% in 2011, from 14.6% in 2010 and 16.2% in 2009.

High Leverage For The Rating Category

Braskem's leverage is high for the rating category. If the company' fails to bring net leverage to around 3.0x in the medium term, a ratings downgrade is likely. As of June 30, 2012, Braskem's leverage ratio as measured by net adjusted debt-to-EBITDA was 4.6x, an increase from 3.7x at the end of 2011 and 2.9x in 2010.

Proactive Liability Management/Robust Liquidity

Braskem's management has been adopting a conservative and pro-active financial strategy to limit the risks associated to its business exposure to a cyclic and capital intensive industry. As a result, the company has a robust liquidity position and a manageable debt amortization profile. As of June 30, 2012, Braskem had BRL3.5 billion of cash and marketable securities. The company's liquidity position is further supported by USD600 million of undrawn standby credit lines due in 2015 and 2016, without material adverse change clauses. These levels of liquidity compare with BRL1.6 billion of short-term debt. As of June 30, 2012, Braskem had BRL18.4 billion of total adjusted debt. This debt incorporates BRL1.6 billion debt of tax related debt (Refis).

Key Rating Drivers

Braskem's inability to increase its cash flow generation or to reduce leverage in the medium term will lead to a rating downgrade. Braskem's performance is strongly focused on the Brazilian economy, as around 65% of its revenues are generated in the local market. A downturn of the economy would weaken the company's results and could also result in a negative rating action.

A positive rating action is not likely until the company significantly improves its operational performance and/or substantially lowers its financial obligations.

Fitch has affirmed and revised the Outlook to Negative for the following ratings:

Braskem S.A.

-- Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-';

-- Long-term local currency IDR at 'BBB-';

-- Long-term national rating at 'AA+(bra)';

-- Unsecured senior notes due 2014 and 2017 at 'BBB-'.

Braskem International

-- Long-term foreign currency IDR at 'BBB-';

-- Unsecured senior notes due in 2015 at 'BBB-'.

Braskem Finance Limited

-- Long-term foreign currency IDR at 'BBB-';

-- Unsecured senior notes due 2018, 2020 and 2021 at 'BBB-';

-- Unsecured senior perpetual bonds at 'BBB-'.

Braskem America Finance Company

-- Long-term local and foreign currency IDR at 'BBB-';

-- Unsecured senior notes due 2041 at 'BBB-'.

Additional information is available at ' www.fitchratings.com '. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

-- 'Corporate Rating Methodology'(Aug. 8, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

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SOURCE: Fitch Ratings

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