Standard & Poor's Ratings Services said today that it has raised the corporate credit and unsecured debt ratings on Germany-based chemicals group BASF SE to 'A+' from 'A'. We affirmed the short-term corporate credit rating at 'A-1'.
The outlook is stable.
The upgrade reflects our perception of BASF's stronger commitment to debt reduction and therefore more supportive financial policy, together with continued impressive operating results and free cash flow. Management publicly stated that it will make debt reduction a priority in 2011, as it focuses on integrating the Cognis acquisition. Consequently, we do not expect further midsize acquisitions in the near term. Also, the company did not request share buyback approval for the next 12 months.
Repeated acquisitions and rising debt had been our main reasons for last year's downgrade. As a result and anticipating very strong 2011 results, BASF is likely to regain significant financial headroom. Strong free cash flow generation capacity and our forecast for record EBITDA should lead to 2011 adjusted funds from operations (FFO) to debt metrics comfortably exceeding the 45%-50% level commensurate with the rating.
The stable outlook factors in our expectation of a supportive medium-term chemicals environment and renewed ratings headroom that should arise from lower debt in 2011. At the 'A+' ratings level, we view a ratio of adjusted FFO to debt of about 45%-50% as commensurate. For 2011, we expect this ratio to be at or above 60% given top-cycle conditions. Our ratings scenario also factors in a resumption of potential acquisitions or share buybacks starting in 2012 or 2013, notably if funded from free cash flow.
The possibility of a downgrade is limited in our view but could stem from repeated debt-financed acquisitions such as observed in 2007-2010 or a material drop in adjusted FFO to debt from the ratios we mention above, without short-term prospects of recovery. An upgrade is unlikely in our view because of the industry's cyclicality and limited visibility we have on the group's future acquisition policy.