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Settore da tenere d'occhio. Il Report risale a fine aprile: va perciò verificata l'attualità di ratings e creditwatch... 
In più, tutto il settore o quasi è sensibile ai prezzi dell'oil... insomma, una buona base di partenza, ma da aggiornare.
Table 1 European Chemicals
L'Air Liquide S.A. (A+/Stable/A-1)
The planned merger of Linde and BOC will likely offer L'Air Liquide and other industry players the possibility for small to midsize bold-on acquisitions in the industrial gas segment. Operating performance is not expected to be affected by the consolidation in the industry and is expected to remain strong. Air Liquide’s cash flow protection ratios should continue to improve slightly in the course of 2006, after achieving funds from operations (FFO) to fully adjusted net debt of about 38% at Dec. 31, 2005. Despite increased capital expenditures from 2007, a higher operating cash flow should help to stabilize FFO to fully adjusted net debt at about 45% within the next 18 months. First-quarter 2006 sales were up 12%, underpinning continuously strong operations.
Akzo Nobel N.V. (A-/Stable/A-2)
Akzo's coatings business showed a strong improvement in operating profits in the first quarter of 2006, benefiting from last year’s price increases and a solid demand picture in most markets. More news regarding the minority floating of BioScience Division is expected in the second half of the year. Credit coverage ratios are likely to continue their improvement, as proceeds from the floatation of BioScience, disposal proceeds of noncore chemicals assets, a flowback of working capital in the second half of the year, and continuously strong performance of chemicals should support cash flow generation.
Basell AF S.C.A. (B+/Stable/--)
Basell's 2005 results reflected the good industry environment for PP and PE producers. Cash flow generation has been supported by a working capital inflow, despite increased raw-material costs and significant disposal proceeds, supporting improvement in FFO to fully adjusted net debt to about 16% at Dec. 31, 2006. The recent increase and volatility in naphtha prices are expected to reduce margins in the first quarter of 2006 compared with 2005 and first-quarter results will be weaker than last year. As the supply/demand balance for PP remains strong, Basell should be able to pass on the higher costs to customers in the course of 2006. However, further deleveraging is needed, as Basell just matches cash flow protection ratios close to the peak of the cycle, and 2006 may mark its highest earnings.
BASF AG (AA-/Negative/A-1+)
BASF agreed to acquire Degussa's construction chemicals division for a total consideration of €2.7 billion. The transaction is expected to be close in the summer. So far, BASF has not increased its bid for Engelhard Corp. (A-/Watch Dev/A-2) and fewer than 1% of shareholders have accepted the bid. Standard & Poor's considers that both acquisitions would be manageable within the rating, allowing for moderate but not unreasonable increments in the final price for Engelhard. Nevertheless, the offers, along with higher shareholder payouts in recent years, signal a more aggressive policy that could eventually lead to a rating downgrade. Current cash flow coverage ratios are strong, with FFO to fully adjusted net debt of 112% at Dec. 31, 2006. BASF is expected to benefit for at least another year from strong business performance in the petrochemicals industry.
BOC Group PLC (The) (A/Watch Neg/A-1)
The ratings on BOC remain on Credit Watch with negative implications, after BOC’s shareholders received an offer from Linde AG of £16 per share, which BOC’s board has proposed they accept. Approval from antitrust authorities remains a significant milestone, even though there is only a limited overlap of the regional activities of both companies, as it will influence the final financing structure and timing of the transaction. A downgrade of the corporate credit rating on BOC is likely to be limited to four notches, assuming successful execution of the latest plans presented by Linde.
BorsodChem Rt (BB/Stable/--)
Operating performance remained very satisfactory in the fourth quarter of 2005, with an EBITDA margin at about 14%. Methylene di-para-phenylene isocyanate (MDI) prices remained very good, toluene di-isocyanate (TDI) prices continued their slight decrease, while PVC prices varied between the months. Gas prices remained high. The group is progressing with its expansion plans by establishing new production lines. Notably, the commissioning of the new aniline expansion (from 110 thousand tons to 150 thousand tons per year) was successful. Nevertheless, these significant capital expenditure programs maintained free operating cash flow in the red in 2005 (which is already factored into the rating). This should strengthen business positions, however, if implemented as successfully as past programs.
Ciba Specialty Chemicals Holding Inc. (A-/Watch Neg/A-2)
Ciba announced the sale of its textile business to Huntsman Corp. (BB-/Watch Dev/--) for a total consideration of Swiss franc (SFr) 332 million ($254 million), which is slightly below 3x EBITDA in 2005. Ciba's net proceeds from the transaction for debt reduction will therefore be only about SFr200 million in 2006 and SFr80 million-SFr100 million in 2007. According to Standard & Poor's calculation, FFO to fully adjusted net debt will weaken in 2006 to about 25%. In addition, the sale of the textile business will represent a significant change for the remaining parts of Ciba's business, as it represented 17% of Ciba's overall sales in 2005, and the business units have been highly integrated, particularly for logistics reasons and management functions. In resolving the Creditwatch on the 'A-' rating, we will evaluate the extent to which Ciba is likely to adopt a more aggressive strategy after the substantial change in the group's structure, in response to market pressures. We acknowledge that Ciba's remaining businesses have strong business risk characteristics, despite somewhat challenging market conditions at present. The rating could potentially be lowered by one or two notches should the company adopt a more aggressive financial policy to support a change in strategy. Ciba's first-quarter 2006 results were weak, as no further selling-price increases could be passed on to customers and paper chemcicals' markets continued to suffer.
Clariant AG (BBB/Stable/A-2)
In 2005, Clariant's operating profit margins dropped as a result of high restructuring costs and increased raw-material costs that could only partially be passed on to customers. In addition, strong outflow for working capital led to an increase in debt. As a result, key credit-protection ratios such as FFO to fully adjusted net debt dropped to about 24% in 2005, compared with 32% at year-end 2004. Adjusted for the restructuring costs, FFO to fully adjusted net debt dropped to 29%. We expect credit protection ratios to improve in 2006 as a result of further cost savings from the restructuring program, further price increases to improve operating margin, lower financing costs, and a lower tax rate, which are expected to more than offset volatile raw-material costs and restructuring costs. Clariant issued a €600 million bond through Clariant Finance on March 22.
Cognis GmbH (B+/Negative/--)
Cognis' shareholders have recently announced plans to explore and pursue various strategic options for the company. While an IPO or sale to a strategic partner with a higher rating would have a positive impact on the company's credit quality, a secondary LBO could result in even higher leverage and a deterioration of the ratings. Standard & Poor's will continue to monitor any developments. Cognis' 2005 results have been affected by the weak performance of the oleochemicals business, with glycerine prices posting further declines and a significant drop in sales for its Vitamin E business in Nutrition & Health. Free operating cash flow generation was slightly positive (at €9 million) in 2005, as working capital outflow remained limited to €11 million, but remains negligible in the context of the debt load at about 0.3% for 2005. Cash flow generation in 2006 is expected to benefit from improved operating cash flow generation and somewhat lower restructuring cash costs (€48 million in 2005). Cash flow protection ratios in 2005 remained below the required level for the rating, with funds from operations (FFO) to fully adjusted debt of 6%.
Degussa AG (BBB/Watch Neg/A-3)
Degussa announced it will its construction chemicals division to BASF. In combination with proceeds from other disposals, Degussa’s financial debt will be largely paid down by this summer, when RAG plans to take full control on the company's cash flow. RAG’s AGM will take place on May 29. The ultimate credit quality of Degussa and RAG will also depend on the state and federal governments' willingness to continue subsidies to RAG, to assume liabilities, or allow restructuring or closure of loss-making operations. The potential range of rating outcomes is quite wide, from investment grade to low speculative grade if the governments back away from their obligations. It is likely to take more than the usual 90 days to resolve this CreditWatch status, although updates and further rating actions are likely, as various elements of the restructuring become better defined.
Dynea International Oy (B/Stable/--)
Dynea's fourth-quarter 2005 EBITDA margin improved both year on year and sequentially, notably as a result of the good U.S. results. The group also successfully closed its refinancing, leading to the redemption of all the expensive 12.25% high-yield notes, due 2010. As a result of the related and material interest costs savings, FFO and FOCF should increase in 2006.
Imperial Chemical Industries PLC (BBB/Stable/A-2)
At Dec. 31, 2005, ICI had net financial debt of £745 million, which is significantly improved from previous years. However, the U.K. pension fund review resulted in a significantly higher deficit than expected of £1.7 billion, up from £1.2 billion in 2004, and will trigger an increase in top-up payments of currently £62 million per year to £122 million. ICI increased its sales by 6% in 2005 on a comparable basis. Two-thirds of this increase was due to higher selling prices and was able to stop margin erosion. Credit protection ratios suffered, however, as a result of the significant increase in the pension deficit, with funds from operations (FFO) to fully adjusted net debt at about 27%. In contrast to its U.S. competitors, ICI is not involved in the lead paint litigation in the U.S. and Millennium's claim that ICI must bear part of the costs currently seems not very likely and should not affect cash flows of ICI. However, the situation will be monitored carefully.
Ineos Group Holdings PLC (B+/Stable/--)
Results for 2005 are expected to be broadly favorable, notably thanks to good market conditions across business lines, from petrochemical to refining to chemicals. These trends are estimated to last in the next quarter. The integration of Innovene is to remain the group’s top priority in the short term.
Ineos Vinyls Ltd. (B/Stable/--)
EBITDA generation remained weak in the fourth quarter of 2005, owing to high raw-material prices not passed on to clients, weaknesses in PVC prices and some unexpected facility issues. Financially, the group's standalone situation remained very tight, with net debt not diminishing (about €226 million as of December 2005) and free operating cash flow generation is expected to remain limited in the short-term, given a narrow EBITDA margin and relatively significant capital expenditure (at least €20 million-€25 million per year). Nevertheless, the parent company Ineos has the means to provide some help, notably through its €50 million subordinated loan facility, available over the next three years (fully undrawn as of December 2005). The relatively expensive €1 billion project in Germany (new cracker) is not yet factored in to the rating, as it has still to be launched, and is expected to be funded separately, through a project finance.
Innospec Inc. (BB-/Negative/--)
The group continued to face the challenge of replacing its very profitable, but shrinking, tetraethyl lead (TEL) business, which still accounted for a very high part of the group's fourth-quarter 2005 operating income (before central costs). We will monitor debt-funded growth, the contribution to profits of acquisitions and the nex products and activities, and the exit of key clients.
LANXESS AG (BBB-/Stable/A-3)
In 2005, LANXESS reported a 5.6% sales increase and a 30% improvement in EBITDA before restructuring. This was mainly a result of strong pricing power, with prices up by 8%, while volumes dropped by 3%. Cash flow generation improved and benefited from a €106 million reduction in working capital, while cashouts for restructuring were modest in 2005, but will be significant in 2006. FFO to fully adjusted net debt reached 32% if adjusted for restructuring costs, which was close to the 30% that Standard & Poor’s expects LANXESS to achieve through the cycle.
Kazanorgsintez OJSC (B-/Stable/--)
Russia-based Kazanorgsintez is expected to show good operational results for 2005, with an EBITDA margin of at least 20%. Nevertheless, Standard & Poor's expects leverage and free cash flow generation to materially weaken in 2006, in line with significant expansion projects.
LBC Holdings LLC (B/Negative/--)
Operational performance in the third quarter of 2005 was good, with an EBITDA margin at about 38%, following the favorable trend of the first and second quarters. FOCF generation remained limited, owing to significant interest expenses. We will closely monitor the continuation and resilience of this improving performance, as well as free cash flow generation capabilities.
Linde AG (BBB+/Watch Neg/A-2)
Linde’s plans for the acquisition of BOC will significantly deteriorate the company’s cash flow protection ratios. The increased bid at £16 per BOC share will result in financing needs of about €13.5 billion for the transaction, comprising the purchase price and the refinancing of BOC's debt and pension liabilities. Linde plans to finance this by a rights issue of about €1.4billion-€1.8 billion, substantial asset disposals, and diverse debt instruments, which are expected to reflect about 50% of the total transaction value. As a result, Linde's key cash flow protection ratios and debt leverage are expected to be aggressive, especially in the first two years after the closing of the transaction. However, Linde's operating cash flow generation will substantially benefit from the integration of BOC, and the focus on industrial gases and engineering should result in an even more stable cash flow stream, supporting fairly quick deleveraging. Standard & Poor's will seek to resolve the CreditWatch following a decision by the antitrust authorities and after Linde has successfully bought the majority of BOC's share capital.
OAO Plastcard (CCC+/Stable/--) OAO Caustic (CCC+/Stable/--)
Standard & Poor's expects Caustic and Plastcard to roll over existing maturities and will particularly focus on the group's liquidity arrangements for December 2006, when their ruble bonds mature. Although 2005 financials are not yet available, the group is expected to report a significant improvement in profitability and cash flow, and this is expected to continue in early 2006. We will also analyse whether the group proceeds with its ambitious capital expenditure plan to significantly expand PVC capacity, as finalization of the project's terms (in particular, the structure of any joint-venture arrangements) will be the key for the group's cash generation in the future. Still, lack of progress in its legal consolidation remains the key constraint.
Lucite International Group Holdings Ltd. (BB/Watch Dev/--)
Lucite continued to show satisfactory operating performance in the fourth quarter of 2005, with demand for methyl methacrylate (MMA) products still strong, following four good quarters. This also reflects the group's ability to pass on raw-material prices with a three-to-six-month time lag, a trend that is expected to continue. The implementation of a new proprietary manufacturing process (alpha technology) continues with a new dedicated site. If successful, this will prove to be a significant competitive advantage. The majority owner also decided to evaluate the best ROI options, including a sale to a new owner and a refinancing, resulting in the CreditWatch developing placement.
L.V.I. Holding N.V. (B+/Stable/--)
The group's overall EBITDA margin is expected to have been good in the fourth quarter of 2005, continuing the good trend of the first nine months. This again reflected better price control and good volumes at its North American operations (CNA)--which have led to higher margins--and still good market dynamics in Europe. Steel industry production cutbacks decided in Europe and North America by major players had only a limited impact, owing to good pricing. Leverage (debt to EBITDA) diminished on the back of stable debt and higher EBITDA, compared with 2004.
Rhodia S.A. (B/Stable/B)
The fourth quarter of 2005 highlighted the continuation of the positive turnaround trend, following the group’s reshuffling strategy initiated at the end of 2003. Notably, the fixed-cost savings plan seems on track with the company’s schedule. Other positive news included the disposal of weakly performing assets. The group completed the sale of its loss-making, difficult fine-chemical unit—with one of lowest EBITDA margins of Rhodia's units--as well as its latex activities (2004 sales: €150 million), including dispersions and powders. After the successful €600 million equity increase, Rhodia is expected to save a material €45 million per year on the substantial interest burden, or about 18% of the 2005 total interests. The interest burden should remain significant in the short-term, however, and the 2005 FFO to net-adjusted debt was below the rating level (of 10%). The group's near-term liquidity provisions should remain sufficient to cover its cash requirements. We will continue to monitor the various legal proceedings, which coud result in payments of significant amounts.
Royal DSM N.V. (A-/Stable/A-2)
DSM's 2005 results benefited from favorable industry conditions in its chemicals divisions and solid performance in its life science products and food businesses. Sales increased by 4.6% as a result of strong price increases and unadjusted EBITDA improved by 24.0% in 2005. DSM's earnings structure in 2005 was well balanced, with about 50% of EBITDA stemming from life science products and nutritional products, and 50% from performance materials and industrial chemicals. The group's financial profile remains modest. DSM's ratio of FFO to fully adjusted net debt was about 101% at Dec. 31, 2005. Fully adjusted net debt to EBITDA was 0.7x and offers the company significant financial flexibility within the ratings, as operating business performance is expected to remain strong in 2006. First-quarter 2006 results continued to be strong, with EBITDA increasing by 5% and net debt only slightly up, despite significant outflow for working capital and higher capital expenditures.
Saudi Basic Industries Corp. (A/Stable/A-1)
SABIC closed 2005 with a strong reduction in net debt and key cash flow protection ratios. FFO to fully adjusted net debt improved to about 250%. However, first-quarter results will be lower, as prices for key petrochemicals are currently at levels seen at the beginning of 2005 and SABIC’s preliminary operating results declined by about 11% reflecting lower cracker margins. However, as demand/supply remains tight in the industry, we expect that key petrochemical prices to rise again, to improve SABIC’s profits in the course of 2006, and cash flow generation to further strengthen the company's balance sheet. SABIC successfully floated 35% of Yansab and received about $525 million cash inflows, which will further strengthen the balance sheet.
SICPA Holding S.A. (B+/Stable/--)
SICPA is to continue its focus on its core security products, some of which display strong growth potential. Under the current 'B+' rating, the group continues to have some leeway for small acquisitions and/or increased capital expenditures.
Sika AG (A-/Stable/A-2)
Sika posted a strong increase in operating profits in 2005, driven by volume growth (+12%), while raw-material costs weighed on margins. Sika's credit protection ratios have suffered as a result of the acquisition of Sarna. There has been no cash flow contribution from Sarna booked in 2005, as the consolidation took place on Dec. 27, 2005. FFO to fully adjusted net debt reached about 40% at the end of December 2005. The company’s free cash flow generation is expected to be strong in 2006, despite increased investments and integration costs for Sarnafil, and allow for a reduction in financial debt. First-quarter 2006 sales increased by 23.7% on an organic basis and, including the acquisition of Sarnafil, by 38.6%, underpinning Sika's excellent business position.
Solvay S.A. (A/Stable/A-1)
Solvay's operating results and financials for the fourth quarter of 2005 were satisfactory, and showed no significant adverse event. TriCor, Fournier's top drug, marketed by Abbott Laboratories Inc. in the U.S., reached blockbuster status in 2005, ahead of expectations. We continue to expect Solvay to restore its financial profile in line with the current ratings by the end of 2006, with FFO to net debt, fully adjusted for leases and pensions, at between 40% and 45%.
Syngenta AG (A-/Stable/A-2)
Syngenta reported a 5% drop in sales in the first quarter of 2006 (1% including currency gains). This reflects the challenging market conditions in Brazil, a long-lasting winter in Europe, and production problems in Seeds. In addition, higher energy costs will be difficult to pass on to customers on the back of declining income of farmers. However, at Dec. 31, 2005, the group's cash flow protection ratios were very strong for the ratings, with FFO covering about 83% of the group's fully adjusted net financial debt. This gives the company financial flexibility for small to midsize acquisitions as well for its shareholder-friendly financial policy.
Yara International ASA (BBB+/Stable/A-2)
Despite higher energy costs in 2005 and lower sales volumes, fertilizer prices remained strong in 2005 and Yara's EBITDA stood at Norwegian krone 6.3 billion, a 7% increase year on year. However, the weaker performance of the downstream business in the last quarter of 2005 was negatively affected by drought in Brazil, resulting in a decline in operating margin. With FFO to fully adjusted net debt of about 47% (using 2004 leasing and pension adjustments), cash flow generation is in line with expectations for the rating. Despite a drop of more than 20% in operating earnings in the first quarter of 2006, Yara’s cash flow generation remained strong and allowed for a further reduction in net debt. More difficult market conditions, with a long, cold winter in Europe and challenging situation in Brazil, as well as higher energy costs, will most likely result in weaker earnings in 2006 compared to 2005.
In più, tutto il settore o quasi è sensibile ai prezzi dell'oil... insomma, una buona base di partenza, ma da aggiornare.Table 1 European Chemicals
L'Air Liquide S.A. (A+/Stable/A-1)
The planned merger of Linde and BOC will likely offer L'Air Liquide and other industry players the possibility for small to midsize bold-on acquisitions in the industrial gas segment. Operating performance is not expected to be affected by the consolidation in the industry and is expected to remain strong. Air Liquide’s cash flow protection ratios should continue to improve slightly in the course of 2006, after achieving funds from operations (FFO) to fully adjusted net debt of about 38% at Dec. 31, 2005. Despite increased capital expenditures from 2007, a higher operating cash flow should help to stabilize FFO to fully adjusted net debt at about 45% within the next 18 months. First-quarter 2006 sales were up 12%, underpinning continuously strong operations.
Akzo Nobel N.V. (A-/Stable/A-2)
Akzo's coatings business showed a strong improvement in operating profits in the first quarter of 2006, benefiting from last year’s price increases and a solid demand picture in most markets. More news regarding the minority floating of BioScience Division is expected in the second half of the year. Credit coverage ratios are likely to continue their improvement, as proceeds from the floatation of BioScience, disposal proceeds of noncore chemicals assets, a flowback of working capital in the second half of the year, and continuously strong performance of chemicals should support cash flow generation.
Basell AF S.C.A. (B+/Stable/--)
Basell's 2005 results reflected the good industry environment for PP and PE producers. Cash flow generation has been supported by a working capital inflow, despite increased raw-material costs and significant disposal proceeds, supporting improvement in FFO to fully adjusted net debt to about 16% at Dec. 31, 2006. The recent increase and volatility in naphtha prices are expected to reduce margins in the first quarter of 2006 compared with 2005 and first-quarter results will be weaker than last year. As the supply/demand balance for PP remains strong, Basell should be able to pass on the higher costs to customers in the course of 2006. However, further deleveraging is needed, as Basell just matches cash flow protection ratios close to the peak of the cycle, and 2006 may mark its highest earnings.
BASF AG (AA-/Negative/A-1+)
BASF agreed to acquire Degussa's construction chemicals division for a total consideration of €2.7 billion. The transaction is expected to be close in the summer. So far, BASF has not increased its bid for Engelhard Corp. (A-/Watch Dev/A-2) and fewer than 1% of shareholders have accepted the bid. Standard & Poor's considers that both acquisitions would be manageable within the rating, allowing for moderate but not unreasonable increments in the final price for Engelhard. Nevertheless, the offers, along with higher shareholder payouts in recent years, signal a more aggressive policy that could eventually lead to a rating downgrade. Current cash flow coverage ratios are strong, with FFO to fully adjusted net debt of 112% at Dec. 31, 2006. BASF is expected to benefit for at least another year from strong business performance in the petrochemicals industry.
BOC Group PLC (The) (A/Watch Neg/A-1)
The ratings on BOC remain on Credit Watch with negative implications, after BOC’s shareholders received an offer from Linde AG of £16 per share, which BOC’s board has proposed they accept. Approval from antitrust authorities remains a significant milestone, even though there is only a limited overlap of the regional activities of both companies, as it will influence the final financing structure and timing of the transaction. A downgrade of the corporate credit rating on BOC is likely to be limited to four notches, assuming successful execution of the latest plans presented by Linde.
BorsodChem Rt (BB/Stable/--)
Operating performance remained very satisfactory in the fourth quarter of 2005, with an EBITDA margin at about 14%. Methylene di-para-phenylene isocyanate (MDI) prices remained very good, toluene di-isocyanate (TDI) prices continued their slight decrease, while PVC prices varied between the months. Gas prices remained high. The group is progressing with its expansion plans by establishing new production lines. Notably, the commissioning of the new aniline expansion (from 110 thousand tons to 150 thousand tons per year) was successful. Nevertheless, these significant capital expenditure programs maintained free operating cash flow in the red in 2005 (which is already factored into the rating). This should strengthen business positions, however, if implemented as successfully as past programs.
Ciba Specialty Chemicals Holding Inc. (A-/Watch Neg/A-2)
Ciba announced the sale of its textile business to Huntsman Corp. (BB-/Watch Dev/--) for a total consideration of Swiss franc (SFr) 332 million ($254 million), which is slightly below 3x EBITDA in 2005. Ciba's net proceeds from the transaction for debt reduction will therefore be only about SFr200 million in 2006 and SFr80 million-SFr100 million in 2007. According to Standard & Poor's calculation, FFO to fully adjusted net debt will weaken in 2006 to about 25%. In addition, the sale of the textile business will represent a significant change for the remaining parts of Ciba's business, as it represented 17% of Ciba's overall sales in 2005, and the business units have been highly integrated, particularly for logistics reasons and management functions. In resolving the Creditwatch on the 'A-' rating, we will evaluate the extent to which Ciba is likely to adopt a more aggressive strategy after the substantial change in the group's structure, in response to market pressures. We acknowledge that Ciba's remaining businesses have strong business risk characteristics, despite somewhat challenging market conditions at present. The rating could potentially be lowered by one or two notches should the company adopt a more aggressive financial policy to support a change in strategy. Ciba's first-quarter 2006 results were weak, as no further selling-price increases could be passed on to customers and paper chemcicals' markets continued to suffer.
Clariant AG (BBB/Stable/A-2)
In 2005, Clariant's operating profit margins dropped as a result of high restructuring costs and increased raw-material costs that could only partially be passed on to customers. In addition, strong outflow for working capital led to an increase in debt. As a result, key credit-protection ratios such as FFO to fully adjusted net debt dropped to about 24% in 2005, compared with 32% at year-end 2004. Adjusted for the restructuring costs, FFO to fully adjusted net debt dropped to 29%. We expect credit protection ratios to improve in 2006 as a result of further cost savings from the restructuring program, further price increases to improve operating margin, lower financing costs, and a lower tax rate, which are expected to more than offset volatile raw-material costs and restructuring costs. Clariant issued a €600 million bond through Clariant Finance on March 22.
Cognis GmbH (B+/Negative/--)
Cognis' shareholders have recently announced plans to explore and pursue various strategic options for the company. While an IPO or sale to a strategic partner with a higher rating would have a positive impact on the company's credit quality, a secondary LBO could result in even higher leverage and a deterioration of the ratings. Standard & Poor's will continue to monitor any developments. Cognis' 2005 results have been affected by the weak performance of the oleochemicals business, with glycerine prices posting further declines and a significant drop in sales for its Vitamin E business in Nutrition & Health. Free operating cash flow generation was slightly positive (at €9 million) in 2005, as working capital outflow remained limited to €11 million, but remains negligible in the context of the debt load at about 0.3% for 2005. Cash flow generation in 2006 is expected to benefit from improved operating cash flow generation and somewhat lower restructuring cash costs (€48 million in 2005). Cash flow protection ratios in 2005 remained below the required level for the rating, with funds from operations (FFO) to fully adjusted debt of 6%.
Degussa AG (BBB/Watch Neg/A-3)
Degussa announced it will its construction chemicals division to BASF. In combination with proceeds from other disposals, Degussa’s financial debt will be largely paid down by this summer, when RAG plans to take full control on the company's cash flow. RAG’s AGM will take place on May 29. The ultimate credit quality of Degussa and RAG will also depend on the state and federal governments' willingness to continue subsidies to RAG, to assume liabilities, or allow restructuring or closure of loss-making operations. The potential range of rating outcomes is quite wide, from investment grade to low speculative grade if the governments back away from their obligations. It is likely to take more than the usual 90 days to resolve this CreditWatch status, although updates and further rating actions are likely, as various elements of the restructuring become better defined.
Dynea International Oy (B/Stable/--)
Dynea's fourth-quarter 2005 EBITDA margin improved both year on year and sequentially, notably as a result of the good U.S. results. The group also successfully closed its refinancing, leading to the redemption of all the expensive 12.25% high-yield notes, due 2010. As a result of the related and material interest costs savings, FFO and FOCF should increase in 2006.
Imperial Chemical Industries PLC (BBB/Stable/A-2)
At Dec. 31, 2005, ICI had net financial debt of £745 million, which is significantly improved from previous years. However, the U.K. pension fund review resulted in a significantly higher deficit than expected of £1.7 billion, up from £1.2 billion in 2004, and will trigger an increase in top-up payments of currently £62 million per year to £122 million. ICI increased its sales by 6% in 2005 on a comparable basis. Two-thirds of this increase was due to higher selling prices and was able to stop margin erosion. Credit protection ratios suffered, however, as a result of the significant increase in the pension deficit, with funds from operations (FFO) to fully adjusted net debt at about 27%. In contrast to its U.S. competitors, ICI is not involved in the lead paint litigation in the U.S. and Millennium's claim that ICI must bear part of the costs currently seems not very likely and should not affect cash flows of ICI. However, the situation will be monitored carefully.
Ineos Group Holdings PLC (B+/Stable/--)
Results for 2005 are expected to be broadly favorable, notably thanks to good market conditions across business lines, from petrochemical to refining to chemicals. These trends are estimated to last in the next quarter. The integration of Innovene is to remain the group’s top priority in the short term.
Ineos Vinyls Ltd. (B/Stable/--)
EBITDA generation remained weak in the fourth quarter of 2005, owing to high raw-material prices not passed on to clients, weaknesses in PVC prices and some unexpected facility issues. Financially, the group's standalone situation remained very tight, with net debt not diminishing (about €226 million as of December 2005) and free operating cash flow generation is expected to remain limited in the short-term, given a narrow EBITDA margin and relatively significant capital expenditure (at least €20 million-€25 million per year). Nevertheless, the parent company Ineos has the means to provide some help, notably through its €50 million subordinated loan facility, available over the next three years (fully undrawn as of December 2005). The relatively expensive €1 billion project in Germany (new cracker) is not yet factored in to the rating, as it has still to be launched, and is expected to be funded separately, through a project finance.
Innospec Inc. (BB-/Negative/--)
The group continued to face the challenge of replacing its very profitable, but shrinking, tetraethyl lead (TEL) business, which still accounted for a very high part of the group's fourth-quarter 2005 operating income (before central costs). We will monitor debt-funded growth, the contribution to profits of acquisitions and the nex products and activities, and the exit of key clients.
LANXESS AG (BBB-/Stable/A-3)
In 2005, LANXESS reported a 5.6% sales increase and a 30% improvement in EBITDA before restructuring. This was mainly a result of strong pricing power, with prices up by 8%, while volumes dropped by 3%. Cash flow generation improved and benefited from a €106 million reduction in working capital, while cashouts for restructuring were modest in 2005, but will be significant in 2006. FFO to fully adjusted net debt reached 32% if adjusted for restructuring costs, which was close to the 30% that Standard & Poor’s expects LANXESS to achieve through the cycle.
Kazanorgsintez OJSC (B-/Stable/--)
Russia-based Kazanorgsintez is expected to show good operational results for 2005, with an EBITDA margin of at least 20%. Nevertheless, Standard & Poor's expects leverage and free cash flow generation to materially weaken in 2006, in line with significant expansion projects.
LBC Holdings LLC (B/Negative/--)
Operational performance in the third quarter of 2005 was good, with an EBITDA margin at about 38%, following the favorable trend of the first and second quarters. FOCF generation remained limited, owing to significant interest expenses. We will closely monitor the continuation and resilience of this improving performance, as well as free cash flow generation capabilities.
Linde AG (BBB+/Watch Neg/A-2)
Linde’s plans for the acquisition of BOC will significantly deteriorate the company’s cash flow protection ratios. The increased bid at £16 per BOC share will result in financing needs of about €13.5 billion for the transaction, comprising the purchase price and the refinancing of BOC's debt and pension liabilities. Linde plans to finance this by a rights issue of about €1.4billion-€1.8 billion, substantial asset disposals, and diverse debt instruments, which are expected to reflect about 50% of the total transaction value. As a result, Linde's key cash flow protection ratios and debt leverage are expected to be aggressive, especially in the first two years after the closing of the transaction. However, Linde's operating cash flow generation will substantially benefit from the integration of BOC, and the focus on industrial gases and engineering should result in an even more stable cash flow stream, supporting fairly quick deleveraging. Standard & Poor's will seek to resolve the CreditWatch following a decision by the antitrust authorities and after Linde has successfully bought the majority of BOC's share capital.
OAO Plastcard (CCC+/Stable/--) OAO Caustic (CCC+/Stable/--)
Standard & Poor's expects Caustic and Plastcard to roll over existing maturities and will particularly focus on the group's liquidity arrangements for December 2006, when their ruble bonds mature. Although 2005 financials are not yet available, the group is expected to report a significant improvement in profitability and cash flow, and this is expected to continue in early 2006. We will also analyse whether the group proceeds with its ambitious capital expenditure plan to significantly expand PVC capacity, as finalization of the project's terms (in particular, the structure of any joint-venture arrangements) will be the key for the group's cash generation in the future. Still, lack of progress in its legal consolidation remains the key constraint.
Lucite International Group Holdings Ltd. (BB/Watch Dev/--)
Lucite continued to show satisfactory operating performance in the fourth quarter of 2005, with demand for methyl methacrylate (MMA) products still strong, following four good quarters. This also reflects the group's ability to pass on raw-material prices with a three-to-six-month time lag, a trend that is expected to continue. The implementation of a new proprietary manufacturing process (alpha technology) continues with a new dedicated site. If successful, this will prove to be a significant competitive advantage. The majority owner also decided to evaluate the best ROI options, including a sale to a new owner and a refinancing, resulting in the CreditWatch developing placement.
L.V.I. Holding N.V. (B+/Stable/--)
The group's overall EBITDA margin is expected to have been good in the fourth quarter of 2005, continuing the good trend of the first nine months. This again reflected better price control and good volumes at its North American operations (CNA)--which have led to higher margins--and still good market dynamics in Europe. Steel industry production cutbacks decided in Europe and North America by major players had only a limited impact, owing to good pricing. Leverage (debt to EBITDA) diminished on the back of stable debt and higher EBITDA, compared with 2004.
Rhodia S.A. (B/Stable/B)
The fourth quarter of 2005 highlighted the continuation of the positive turnaround trend, following the group’s reshuffling strategy initiated at the end of 2003. Notably, the fixed-cost savings plan seems on track with the company’s schedule. Other positive news included the disposal of weakly performing assets. The group completed the sale of its loss-making, difficult fine-chemical unit—with one of lowest EBITDA margins of Rhodia's units--as well as its latex activities (2004 sales: €150 million), including dispersions and powders. After the successful €600 million equity increase, Rhodia is expected to save a material €45 million per year on the substantial interest burden, or about 18% of the 2005 total interests. The interest burden should remain significant in the short-term, however, and the 2005 FFO to net-adjusted debt was below the rating level (of 10%). The group's near-term liquidity provisions should remain sufficient to cover its cash requirements. We will continue to monitor the various legal proceedings, which coud result in payments of significant amounts.
Royal DSM N.V. (A-/Stable/A-2)
DSM's 2005 results benefited from favorable industry conditions in its chemicals divisions and solid performance in its life science products and food businesses. Sales increased by 4.6% as a result of strong price increases and unadjusted EBITDA improved by 24.0% in 2005. DSM's earnings structure in 2005 was well balanced, with about 50% of EBITDA stemming from life science products and nutritional products, and 50% from performance materials and industrial chemicals. The group's financial profile remains modest. DSM's ratio of FFO to fully adjusted net debt was about 101% at Dec. 31, 2005. Fully adjusted net debt to EBITDA was 0.7x and offers the company significant financial flexibility within the ratings, as operating business performance is expected to remain strong in 2006. First-quarter 2006 results continued to be strong, with EBITDA increasing by 5% and net debt only slightly up, despite significant outflow for working capital and higher capital expenditures.
Saudi Basic Industries Corp. (A/Stable/A-1)
SABIC closed 2005 with a strong reduction in net debt and key cash flow protection ratios. FFO to fully adjusted net debt improved to about 250%. However, first-quarter results will be lower, as prices for key petrochemicals are currently at levels seen at the beginning of 2005 and SABIC’s preliminary operating results declined by about 11% reflecting lower cracker margins. However, as demand/supply remains tight in the industry, we expect that key petrochemical prices to rise again, to improve SABIC’s profits in the course of 2006, and cash flow generation to further strengthen the company's balance sheet. SABIC successfully floated 35% of Yansab and received about $525 million cash inflows, which will further strengthen the balance sheet.
SICPA Holding S.A. (B+/Stable/--)
SICPA is to continue its focus on its core security products, some of which display strong growth potential. Under the current 'B+' rating, the group continues to have some leeway for small acquisitions and/or increased capital expenditures.
Sika AG (A-/Stable/A-2)
Sika posted a strong increase in operating profits in 2005, driven by volume growth (+12%), while raw-material costs weighed on margins. Sika's credit protection ratios have suffered as a result of the acquisition of Sarna. There has been no cash flow contribution from Sarna booked in 2005, as the consolidation took place on Dec. 27, 2005. FFO to fully adjusted net debt reached about 40% at the end of December 2005. The company’s free cash flow generation is expected to be strong in 2006, despite increased investments and integration costs for Sarnafil, and allow for a reduction in financial debt. First-quarter 2006 sales increased by 23.7% on an organic basis and, including the acquisition of Sarnafil, by 38.6%, underpinning Sika's excellent business position.
Solvay S.A. (A/Stable/A-1)
Solvay's operating results and financials for the fourth quarter of 2005 were satisfactory, and showed no significant adverse event. TriCor, Fournier's top drug, marketed by Abbott Laboratories Inc. in the U.S., reached blockbuster status in 2005, ahead of expectations. We continue to expect Solvay to restore its financial profile in line with the current ratings by the end of 2006, with FFO to net debt, fully adjusted for leases and pensions, at between 40% and 45%.
Syngenta AG (A-/Stable/A-2)
Syngenta reported a 5% drop in sales in the first quarter of 2006 (1% including currency gains). This reflects the challenging market conditions in Brazil, a long-lasting winter in Europe, and production problems in Seeds. In addition, higher energy costs will be difficult to pass on to customers on the back of declining income of farmers. However, at Dec. 31, 2005, the group's cash flow protection ratios were very strong for the ratings, with FFO covering about 83% of the group's fully adjusted net financial debt. This gives the company financial flexibility for small to midsize acquisitions as well for its shareholder-friendly financial policy.
Yara International ASA (BBB+/Stable/A-2)
Despite higher energy costs in 2005 and lower sales volumes, fertilizer prices remained strong in 2005 and Yara's EBITDA stood at Norwegian krone 6.3 billion, a 7% increase year on year. However, the weaker performance of the downstream business in the last quarter of 2005 was negatively affected by drought in Brazil, resulting in a decline in operating margin. With FFO to fully adjusted net debt of about 47% (using 2004 leasing and pension adjustments), cash flow generation is in line with expectations for the rating. Despite a drop of more than 20% in operating earnings in the first quarter of 2006, Yara’s cash flow generation remained strong and allowed for a further reduction in net debt. More difficult market conditions, with a long, cold winter in Europe and challenging situation in Brazil, as well as higher energy costs, will most likely result in weaker earnings in 2006 compared to 2005.
