Evonik Industries AG

8 SEPTEMBER 21, 2010
GLOBAL CORPORATE FINANCE
Score of A for the “Size and Stability” rating factor reflects the group’s scale and breadth ...
With annual revenues of €13.1 billion (€10.0 billion for its chemicals division), EI is among the largest
European chemical issuers rated by Moody’s. On a more negative note, the group’s energy business
clearly lacks scale and breadth compared with other European multi-utilities. Moody’s expects the size
of the group to remain relatively stable in the short to medium term, given that parts of the proceeds
from a potential sale of a stake in the group’s energy business would be reinvested in the chemicals
franchise while the other part will be applied to debt reduction. We do not expect EI to embark on an
aggressive external expansion strategy as the group’s focus will be on maximising its enterprise value
through organic projects and bolt-on acquisitions ahead of a potential IPO.
... and the stability of its operating margins through the cycle
As referred to above, EI’s diversified chemicals portfolio has proven very stable through the downturn,
with EBITDA margins in FY 2009 exceeding those in the previous year. The group’s real estate
business, albeit dilutive in terms of ROCE, offers earnings and operating cash flow stability through
the cycle. As illustrated in Figure 7, below, EI has been able to sustain healthy and stable operating
margins through the cycle and has outperformed its peers.
FIGURE 7
EBITDA margins of EI in comparison to peers
ADJUSTED EBITDA MARGINS 2007 2008 2009
Evonik Industries 14.42% 11.93% 13.87%
Lanxess 9.87% 8.53% 7.81%
Akzo Nobel 13.65% 13.77% 13.84%
Clariant 8.79% 8.64% 4.75%
Low Baa score for the “Cost Position” rating factor offers improvement potential in line with the implementation
of EI’s “On Track” programme
While EI already exhibits relatively high margins compared with most of its peers, Moody’s believes
that the strength of the group’s chemicals operations should allow the group to increase its operating
margins going forward. In addition, EI’s implementation of its broad-based cost optimisation
programme, “On Track”, should help EI to retain industry-leading margins in the medium term, in
Moody’s view. As a consequence of EI’s implementation of this cost optimisation programme and a
higher focus on its chemicals operations, the group’s margins could be lifted into the high Baa – low A
range (i.e. around 15% EBITDA margin) through the cycle.
Financial Risk Factors
High pension liabilities and reported financial debt ...
EI’s overall weak Ba positioning for debt leverage rating factors reflects the group’s relatively high
leverage on an adjusted basis. Adjustments for pension liabilities and operating leases accounted for
almost 60% of EI’s adjusted net indebtedness at FYE 2009. While EI has largely focused on reducing
its financial indebtedness over the past 12-18 months (its net reported indebtedness was reduced by
€1.1 billion to €3.4 billion over the past 18 months to 30 June 2010), the group’s debt metrics remain
weaker than those of its direct peers in high non-investment-grade and low-investment-grade territory.
In Moody’s view, EI’s efforts to further reduce its leverage through asset disposals (the group is
ANALYSIS: EVONIK INDUSTRIES AG