SABIC innovative plastics rated 'BB' on strong business profile, parent support; Outlook stable
Standard & Poor's Ratings Services said today it assigned its 'BB' long-term corporate credit rating to Netherlands-based specialty plastics producer SABIC Innovative Plastics Holding B.V. (SABIC Innovative Plastics), reflecting a highly leveraged capital structure, mitigated primarily by an expectation of support from its parent Saudi Basic Industries Corp. (SABIC; A+/Stable/A-1) and by its strong business risk profile. The outlook is stable.
The ratings reflect a very aggressive capital structure and weak cash flow metrics, with a funds-from-operations-(FFO)-to-debt ratio of about 5%-10% in the coming years and an initial peak leverage with debt to EBITDA of 7.9x according to Standard & Poor's calculations.
"The aggressiveness of the financial profile is the result of SABIC's proposed leveraged acquisition of GE Plastics for a total consideration of $11.6 billion excluding fees and expenses, which will be 70% debt financed," said Standard & Poor's credit analyst Tobias Mock. The acquisition is expected to close in the third quarter of 2007 and is still subject to regulatory approvals. Total unadjusted debt will reach $8.3 billion at closing.
"Standard & Poor's has given one category of uplift to the stand-alone rating, as we have factored in implicit support from SABIC in the case of unexpected operating challenges," said Mr. Mock. Factors considered in our analysis of the parent/subsidiary relationship include SABIC's 100% (indirect) ownership of the new entity, strong strategic fit, access to key end markets, important customer relationships, and the long-term value of technologies for SABIC. This was illustrated by the significant investment and strategic premium price SABIC paid for these assets. SABIC Innovative Plastics had $6.6 billion in sales and an adjusted EBITDA of $1,172 million for the twelve months ending April 1, 2007.
"The stable outlook reflects Standard & Poor's expectation that SABIC Innovative Plastics will remain 100% owned by SABIC and continue to benefit from solid economic growth prospects in the coming years, allowing for some de-leveraging and gradual improvement in key credit protection ratios," said Mr. Mock. The company is expected to balance investments, acquisitions, and dividends to achieve FFO to debt of about 10% and debt to EBITDA of about 5.5x for the assigned rating. A stronger-than-expected de-leveraging trend, better business performance, or equity injections from SABIC would be positive for the rating. A significant weakening in economic activity, significant increase in Benzene prices, and a failure to pass on these higher costs to customers, as well as significant acquisitions or a change in ownership could further weaken the credit metrics and put pressure on the ratings.