Moody's issues provisional ratings in advance of the final sale of securities and these reflect Moody's credit opinion regarding the transaction only. Upon a conclusive review of the final documentation Moody's will endeavour to assign definitive ratings. A definitive rating may differ from a provisional rating.
RATINGS RATIONALE
Ciech Group Financing AB is issuing the notes, together with PLN382 million of Polish Zloty notes and a PLN100 million revolving credit facility, to refinance Ciech's existing indebtedness. The assigned (P)B2 rating reflects the pari passu ranking of the notes with the Polish Zloty notes and behind the super-priority revolving credit facility.
The (P)B2 CFR factors in Ciech's solid position as the largest regional producer of soda ash in Central Europe with production facilities in Poland, Germany and Romania. Moody's positively notes Ciech's low-cost production capabilities, as well as the improved energy efficiency at the company's Polish facilities, following recent investments. The company's competitive position is supported by established supply relationships with leading glass producers in the region and high transportation costs, relative to the cost of production, which mitigate competitive pressures from foreign suppliers and support solid operating margins. However, the rating also recognizes risks associated with the on-going divestment programme of sizable non-core businesses, that have significantly weaker operating and credit characteristics, and Ciech's exposure to cyclical end markets such as construction. Finally, the rating reflects the elevated leverage and moderate historical operating cash flows although balanced by the expectation that Ciech will continue to focus on debt reduction and improving cash flow generation.
Ciech operates four soda ash and baking soda production facilities located in Poland (2), Germany (1) and Romania (1) making it the second-largest producer of soda ash in Europe by capacity, after Solvay SA (Baa1 negative) and the largest producer in Central Europe. Transportation costs can be substantial and customers and suppliers are typically located in close proximity to ensure cost-efficient production, thereby also providing some barriers to entry.
Soda ash is primarily used in the production of glass for construction, automotive and packaging end markets. Other applications include detergents and soaps. Products in Ciech's non-core business find their way into a variety of end markets including paint, coatings or furniture. As such Ciech is exposed to cyclicality, mitigated to a degree by a diversified customer base and strong regional competitive positions in its core soda business.
The soda ash market has seen some consolidation and recovered following a downturn in 2009-10. It is expected to remain on a modest growth trajectory (more so in Central Europe). The market balance, however, remains sensitive to additional supply from lower-cost Turkish producers that run trona-based production processes. The rating assumes limited, if any, near-term pressure on Ciech.
Energy represents the largest cost factor for soda ash production, along other raw materials, such as limestone, brine and anthracite. Ciech procures these mostly under long-term contracts with pre-defined pricing formulas and benefits from backwards integration into limestone, brine and energy (under a sale and leaseback arrangement) at its German facility and into energy at its Polish facilities. From 2013, Ciech will need to procure emission certificates, particularly for its coal-fired Polish facilities, which will require continued focus on energy efficiency and environmental compliance.
Ciech retains a portfolio of non-core businesses including Organic, Agrochemicals and Silicates & Glass, which together accounted for 17% of company-adjusted EBITDA for the last twelve months to September 2012. While Ciech is actively restructuring and divesting these businesses, substantial execution risk exists as the company may not find interested parties, suffer cost overruns or incur unforeseen liabilities. In this context, Moody's would particularly expect the recent divestment and closure of Zachem to be executed as planned and within budget.
Free cash flow (FCF) generation has been somewhat limited given moderate historical EBITDA/cash flow conversion, a high degree of working capital volatility and significant capital expenditure (capex). Moody's expects cash flow conversion to gradually improve as Ciech divests low-margin businesses and reduces restructuring costs while capex spending should reduce in 2013 following the completion of investment projects. However, Ciech is expected to visibly invest from 2014 on to improve energy efficiency at its Polish facilities.
The company remains leveraged following the transaction with estimated adjusted Debt/EBITDA just below 4.0x, pro-forma, for the last twelve months to September 2012. However, Moody's also recognises the debt reduction achieved by Ciech over the past three years and expects the company to maintain its focus on reducing leverage ahead of shareholder distributions.
Ciech falls under Moody's Government-Related Issuers: Methodology Update, published July 2010, given the Polish government's (37.9%) partial ownership of the company. As a result, Moody's overlays the company's underlying credit strength with its joint default analysis for government-related issuers (GRIs). In this context, the assessment of Support is Low reflecting the relative independence of Ciech in managing its operations. It also recognizes the government's endorsement of Ciech's strategy, which is intended to over time maximise the value of the company and reflects the government's long-term aim to realise the monetary value of its stake. The Dependency assessment of Low reflects Ciech's relatively diversified revenue base with only 37% of 2011 revenues generated in Poland and minimal financial linkages with the government. As a result, the rating does not factor in explicit uplift to the b2 baseline credit assessment and would also not be affected if the government were to reduce its ownership.
Moody's views Ciech's liquidity as adequate. As of September 2012, the company had cash balances of PLN161 million and, following the refinancing, will have an undrawn revolving credit facility of PLN100 million. In addition, Ciech will receive EUR43 million from the sale of certain assets of its subsidiary Zachem to BASF in the first half of 2013 following, amongst others, regulatory approval. This should be sufficient to compensate for swings in working capital and temporary capex peaks.
The stable outlook reflects Moody's expectation that Ciech will successfully execute the restructuring and divestment of its non-core businesses over time and regain its focus on the core soda ash business while maintaining adequate liquidity.
WHAT COULD CHANGE THE RATING UP/DOWN
Positive rating pressure could develop if Ciech deleverages further, supported by a successful execution of the restructuring and divestment process, so that adjusted Debt/EBITDA decreases below 3x and FCF/Debt increases above 5%.
Conversely, negative rating pressure could develop if any deviations from Moody's outlined expectations occur, such as a delay in the divestment process or a change in the competitive dynamics of the soda business, leading to weaker operating performance, with adjusted Debt/EBITDA reaching 4.5x and/or free cash flow turning negative; or any liquidity pressures becoming apparent.
The principal methodology used in rating Ciech SA and Ciech Group Financing AB was the Global Chemical Industry Methodology published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009 and the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Ciech SA, headquartered in Poland, is Europe's second-largest soda ash producer, with a focus on Poland, Germany and Central Europe. It also operates a number of non-core chemical businesses that represent 17% of group EBITDA for the last twelve months to September 2012. For the same period, the company generated revenue and normalised EBITDA of PLN4.4 billion and PLN409 million, respectively. Ciech has been listed on the Warsaw Stock Exchange since 2005 and its largest shareholder as of 29 August 2012 was the Polish State Treasury (37.9%).
REGULATORY DISCLOSURES
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Tobias Wagner Analyst Corporate Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Chetan Modi MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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