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Covestro AG -- Moody's assigns P-2 rating to Covestro's new Commercial Paper programme

·14 min read

Rating Action: Moody's assigns P-2 rating to Covestro's new Commercial Paper programmeGlobal Credit Research - 26 Aug 2022Frankfurt am Main, August 26, 2022 -- Moody's Investors Service ("Moody's") assigned Prime-2 (P-2) short-term issuer ratings to Covestro AG (Covestro or the company) and P-2 senior unsecured ratings to Covestro's €1.5 billion Commercial Paper (CP) programme. All existing ratings and the stable outlook of Covestro remain unchanged.RATINGS RATIONALEThe P-2 short-term rating assigned to the CP programme and assigned short-term issuer rating of P-2 reflect the company's strong ability to repay its short-term obligations.Issuances under the CP programme will be unsecured and will rank pari passu among themselves and with all existing and future unsecured obligations of Covestro AG.The P-2 short-term rating reflects Covestro's solid liquidity, supported by cash balances of around €315 million at the end of June 2022 and the availability of a fully undrawn revolving credit facility (RCF) of €2.5 billion, maturing in March 2027. The RCF does not have financial covenants. Moody's expects the company to maintain liquidity buffers in at least the full amount of the CP program.The (i) concentrated market structure for urethanes, polycarbonates and isocyanides and Covestro's cost-competitive production in all three major regions; (ii) favourable demand drivers such as energy efficiency and lightweighting; (iii) management's track record of taking decisive action to defend its investment grade rating, which Moody's expects to continue, support Covestro's Baa2 rating. The company's (i) exposure to the automotive industry accounting for about 17% of revenues; (ii) high correlation to GDP growth that results in earnings volatility; (iii) expectations that higher input costs will continue to hurt EBITDA margin and absolute EBITDA generation; and (iv) the additional operating costs and investment requirements to reduce scope 1 and 2 greenhouse gas emissions by 2030 and beyond, constrain the rating.In late July 2022, Covestro lowered its EBITDA (company-defined) expectation for 2022 to a range of between €1.7 billion and €2.2 billion from previously €2.0 billion to €2.5 billion due to lockdowns in China, higher energy costs and lower than previously expected economic growth. In the light of these earnings headwinds, Moody's expects 2022 leverage to increase to around 1.8x-1.9x from 1.2x in 2021. Disruptions of natural gas exports from Russia to Europe that lead to rationing of natural gas to the industrial sector are part of our downside risk scenario but not built into this forecast or Covestro's rating.Moody's estimates that June 2022 ending cash of around €315 million and expected Funds from Operations (FFO) of around €1.7 billion in the next 12 months are sufficient to cover working capital, dividends (35% to 55% of net income), investments of nearly €1.1 billion (of which around €400 million maintenance investments) and share buybacks of €250 million. The next sizable debt maturity is in 2024 when a €500 million senior unsecured bond is due.RATIONALE FOR THE STABLE OUTLOOKThe stable outlook assumes that Covestro retains a gross leverage ratio (Moody's-adjusted debt/EBITDA) of around 2.5x-3.0x through a range of economic scenarios and that Covestro will continue to execute on synergies from the coating resins (RFM) transaction. The leverage expectation takes into account the inherent metrics volatility through a business cycle.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWhile currently unlikely given downside risks related to economic conditions and energy costs, Moody's could upgrade Covestro's ratings with expectations for leverage below 2.5x and RCF/net debt above 30% on a sustained basis.Moody's could downgrade Covestro's ratings with leverage above 3.0x, RCF/net debt below 20%, or in the absence of consistent positive FCF or its liquidity profile deteriorates otherwise.Moody's would likely tolerate metrics temporarily exceeding these ranges without changing the rating, provided we expect management to take action to preserve credit quality and for metrics to return to levels commensurate with Baa2 rating.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Chemicals published in June 2022 and available at https://ratings.moodys.com/api/rmc-documents/389870. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.CORPORATE PROFILEHeadquartered in Leverkusen, Germany, Covestro is a leading global producer of polyurethanes and polyurethane derivatives as well as polycarbonates. In 2021, Covestro reported sales of around €16 billion and EBITDA of €3.1 billion. As of 22 August 2022, it had a market capitalisation of around €5.8 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. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Moritz Melsbach Vice President - Senior Analyst Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main, 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Karen Berckmann, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main, 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454/td> © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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