Evonik Industries AG

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4 SEPTEMBER 21, 2010 GLOBAL CORPORATE FINANCE ... should pave the way for a successful IPO in the medium term The ultimate target of EI is to float the business in an IPO, as this option would allow both shareholders to fulfil their strategic objectives. CVC could exit its investment in the medium term and RAG-Stiftung could raise proceeds necessary to fund liabilities arising from the discontinuation of Germany’s hard-coal mining operations. Moody’s believes that the successful implementation of EI’s strategy focused on the development of its chemicals franchise will support a successful IPO. All in all, EI’s corporate strategy is sensible and should be supportive of the group’s credit profile, in Moody’s view. The divestment proceeds from the sale of a stake in the energy business will be used to reduce EI’s leverage and should enable the group to strengthen its chemicals franchise. Moody’s considers EI’s focus on its chemicals franchise to be positive, as the group lacks critical mass in energy and already has an excellent platform for growth in chemicals, with leading market positions in most of its chemicals end markets. Moody’s also notes that a more focused group with a strong chemicals franchise should be easier to float on the stock exchange. Key Rating Considerations On September 21, 2010 Moody’s Investors Services has assigned a Ba1 Corporate Family Rating (CFR) for the group and Probability of Default Rating (PDR) to Evonik Industries AG, the holding company of a German-based conglomerate encompassing chemicals, energy and real estate businesses. At the same time, Moody’s has assigned a Ba1 rating to EUR750 million of Senior Unsecured Notes issued by Evonik Industries AG. The outlook on all ratings is stable. This was the first time that Moody’s has rated Evonik Industries AG. Moody’s Ba1 Corporate Family Rating for Evonik reflects the group’s (i) strong business profile in chemicals with leading market positions, large scale, wide end-product and end-market diversity with a good mix between more cyclical upstream activities and stable specialty applications, (ii) above average operating margins at the chemicals business supported by the quality and technology content of its products as well as through a good level of vertical integration through selective ‘Verbund’ structures, (iii) clear strategic path to focus on the group’s strong chemical division by partial divestments of the energy and real estate business notwithstanding that the successful implementation of this strategy bears execution risk, (iv) focus on optimizing its cost structure through the implementation of various cost initiatives across the businesses to further enhance margin levels notwithstanding that Evonik already generates operating margins in excess of most of its European chemicals peers, (v) strong technology- as well as R&D platform (more than 20% of sales generated from products not older than five years) allowing for a timely response to customer needs and to new market trends, and (vi) strong liquidity profile with currently over EUR1.359 billion in cash on balance sheet as well as access to an undrawn EUR1.5 billion unsecured revolving credit facility. The rating remains constrained by Evonik’s (i) leveraged capital structure if compared to investment grade chemicals peers, (ii) aggressive dividend policy (payout ratios was around 100% of net income in FY 2009) which is expected to exert negative pressure on free cash flow generation going forward, (iii) limited exposure to cyclical customer industries such as automotive and construction notwithstanding that the group has no specific concentration on any specific industries, customers or products, (iv) shareholder structure with the cohabitation of a financial investor with a minority stake and a foundation set up in 2007 to wind down the subsidized coal activities of former RAG by 2018, which might have different strategic interests although the execution of the group’s strategy since the change in the ownership structure has been smooth and focused. ANALYSIS: EVONIK INDUSTRIES AG
5 SEPTEMBER 21, 2010 GLOBAL CORPORATE FINANCE The stable outlook assigned to the rating reflects Moody’s expectation that Evonik will continue to focus on deleveraging and will apply discretion in the implementation of its organic growth strategy. The agency’s expectation is predicated upon a gradual recovery in chemicals demand across all regions with continued stronger growth patterns anticipated in emerging economies. The strong recovery in emerging market economies have been the main driver of the recovery in the European Chemicals industry. The derailing of emerging economies growth and / or a reversal in the recovery of developed economies, which are concurrently considered as tail risks could invalidate our assumption underlying the assignment of a stable outlook to Evonik. Continued strong operating performance coupled with prudent balance sheet management and / or proceeds from asset disposals applied to debt reduction leading to Adjusted Net Debt / EBITDA of below 3.5x and RCF / Net Debt of above 15% on a sustainable basis would exert positive pressure on the ratings. A sharp deterioration in the operating environment and / or shift in the group’s organic and external growth strategy leading to sustained negative free cash flow generation and / or a deterioration in Adjusted Net Debt / EBITDA to sustainably above 4.5x would lead to negative pressure on the ratings. The agency would also expect Evonik to maintain RCF / Net Debt in the low double digit to avert negative pressure on the ratings. FIGURE 3 Rating factors table as per Moody’s Global Chemical Industry Rating Methodology EVONIK INDUSTRIES AG CHEMICAL INDUSTRY Factor 1: Business Profile Aaa Aa A Baa Ba B Caa Ca a) Business Position Assessment X Factor 2: Size & Stability a) Revenue (Billions of US$) X b) # of Divisions of Equal Size X c) Stability of EBITDA X Factor 3: Cost Position a) EBITDA Margin (3 Yr. Avg.) X b) ROA - EBIT / Assets (3 Yr. Avg.) X Factor 4: Leverage / Financial policies a) Current Debt / Capital X b) Debt / EBITDA (3 Yr. Avg.) X Factor 5: Financial Strength a) EBITDA / Total Interest Expense (3 Yr. Avg.) X b) Retained Cash Flow / Debt (3 Yr. Avg.) X c) Free Cash Flow / Debt (3 Yr. Avg.) Rating: a) Indicated Rating from Grid X b) Actual Rating Assigned Ba1 X ANALYSIS: EVONIK INDUSTRIES AG
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Evonik Industries AG

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