Covestro AG -- Moody's affirms Covestro's Baa2 rating, changes outlook to stable

Rating Action: Moody's affirms Covestro's Baa2 rating, changes outlook to stableGlobal Credit Research - 31 Mar 2021Frankfurt am Main, March 31, 2021 -- Moody's Investors Service ("Moody's") today affirmed the Baa2 long term issuer and senior unsecured bond ratings of Covestro AG ("Covestro") and its (P)Baa2 senior unsecured MTN programme rating. The outlook on all ratings was changed to stable from negative.RATINGS RATIONALEThe affirmation of its Baa2 rating reflects Covestro's strong performance in the second half of 2020 resulting in full-year 2020 EBITDA of nearly E1.5 billion, only around E100 million lower than in 2019. Operating profitability benefited from cost management and contingency measures, delivering around E350 million of short-term savings, and the Perspective efficiency programme as well as a recovery in demand that resulted in a tighter supply-demand balance and higher prices. Moody's expects these benign conditions to persist during the first half of 2021. Whilst Moody's believes that most of the temporary savings Covestro had achieved in 2020 are likely to reverse in 2021, EBITDA in 2021 and beyond will benefit from structural and more permanent savings stemming from Covestro's "Perspective" and "LEAP" programmes. The successfully completed "Perspective" programme delivered E130 million of cost savings in 2020. Accelerated measures delivered additional short term savings of E70 million in 2020 resulting in cumulative recurring savings from "Perspective" of E350 million annually. "LEAP" aims to keep fixed costs unchanged until 2023 against a 2020 base. In addition, with the closing of the Resins & Functional Materials business (RFM) acquisition, which has been financed predominantly with cash on balance sheet and new equity -- planned in Q2 2021 -- this business is expected to deliver an additional E150 million annual EBITDA before expected total synergies of E120 million.The Baa2 long term issuer rating takes into account the decisive actions that management has taken in response to the coronavirus pandemic such as cost savings measures, the decision to reduce its dividend in 2020 and change its dividend policy from 2021 onwards, the early refinancing of upcoming debt maturities and raising E447 million of equity to fund the RFM transaction.Liquidity remains strong. It is supported by cash and cash equivalents of around E1.4 billion and E1.1 billion invested in highly liquid money market funds as well as loans and bank deposits. Together with expected cash flow of operations (Moody's-adjusted) of around E1.7 billion in 2021 this will be sufficient to fund the E1.55 billion RFM transaction, pay proposed dividends of around E250 million, capital investments of around E800 million and repay the E500 million senior unsecured bond due in October 2021.Moody's-adjusted debt/EBITDA in 2020 amounted to 3.3x and pro-forma the bond repayment and the RFM contribution, gross leverage in 2021 will be below 3.0x and within the thresholds that the rating agency expects for the Baa2 long term issuer rating. Moody's is cognizant that Covestro's financial metrics are prone to wide fluctuations due to the susceptibility of EBITDA volatility -- as evidenced in the 2017-2018 period when the market for TDI was short and in 2020 at the height of the coronavirus pandemic. As long as management takes the right actions to preserve credit quality Moody's would be more tolerant to metrics temporarily exceeding these ranges during severe downturns.RATIONALE FOR STABLE OUTLOOKThe stable outlook assumes that Covestro over the cycle retains a gross leverage ratio (debt/EBITDA) of around 2.5x-3.0x and that the integration of and synergetic benefits from the RFM transaction can be achieved.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded if debt/EBITDA (as adjusted by Moody's) dropped to below 2.5x and if RCF/net debt was to be sustained above 30%. Moody's could downgrade ratings if leverage were to remain above 3.0x, RCF/net debt below 20% and in the absence of consistent positive FCF.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in Leverkusen, Germany, Covestro is a leading global producer of polyurethanes and polyurethane derivatives as well as polycarbonates. In 2020, Covestro reported sales of E10.7 billion and EBITDA of around E1.5 billion.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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