Borealis – Credit Update

8 June 2012 Credit Research
Credit Flash - Borealis AG
The main operating liquidity requirements relate to capital expenditure (the company's
guidance is for lower capex than in FY11 [EUR 282mn] given that there are no significant
capex projects in the pipeline for FY12; annual maintenance capex: EUR 150mn), working
capital requirements (mainly determined by volatility in the oil price and its impact on
inventories), dividends (EUR 110mn to be paid in FY11) and the funding of the PEC-Rhin
acquisition (we estimate an outflow of EUR 100mn). Borealis has access to a syndicated
revolving credit facility of EUR 1.1bn (around EUR 163mn used; maturing in July 2013) and a
further EUR 166mn (in undrawn evergreen facilities, but including a one-year cancellation
notice) in export credit lines. Some of the financing agreements are subject to a gearing (max.
125%; FY11: 35%) and solvency (min. 30%; FY11: 53%) covenant. As a further liquidity
source, Borealis has a securitization program in place under which it sells eligible securities
on a non-recourse (true sale) basis to external parties. EUR 403mn worth of receivables were
sold as of 31 December 2011 (down from EUR 427mn yoy). Borealis faces around EUR 200-
220mn of debt maturities in FY12 and FY13 with the majority relating to the drawing under the
RCF.
Debt metrics At the end of 2011, adjusted net leverage was 2.8x, which was down from the peak level
of 5.1x achieved in bottom-of-the-cycle conditions in FY09. Over a 3Y period, adjusted
net leverage stands at an average of 3.5x, while being close to 3.0x on average over a 5Y
period. We adjust Borealis' debt position for unfunded pension obligations (FY11: EUR
224mn), operating leases (EUR 29mn) as well as factoring (EUR 255mn). The group's equity
ratio stood at 54% at FYE 2011 (FYE 2010: 52%; 3Y average: 52%; 5Y average: 51%)
reflecting the conservatively funded capital structure. In terms of cash flow coverage, we
calculate cash flow from operations/adjusted net debt of 14% in FY11 (vs. 17% in FY10),
which is below the 3Y average of 20% and 5Y average of 26%, with the deterioration being,
among other things, due to continued working capital outflows in FY10 and FY11.
Credit Profile
Credit profile Borealis' credit profile is supported by the conservative financing strategy (equity ratio
stands above 50%), strong diversification (i.e. serves a variety of end-markets),
backward integration, leading market positions and strong innovation focus of Borealis
as well as the group's stable shareholder background. On a more negative note, we note
that Borealis operates in a cyclical industry that is also currently facing difficult market
conditions, is subject to significant input cost volatility (that can negatively impact margins and
influence working capital requirements) and faces high capex requirements with the capacity
expansion at Borouge (although most is expected to be covered by the JV's earnings
contribution). With regard to event risk, we highlight the group's prudent focus on smaller bolton
acquisitions, but note the existing uncertainties surrounding the potential acquisition of a
minority stake in NOVA Chemicals.
UniCredit Research page 8 See last pages for disclaimer.