Moody's: European chemical companies' diversity to protect profitability in 2016

Thursday 21 July 2016

London – MENA Herald : European chemical companies' high degree of diversification will help them maintain operating profitability in 2016, despite uneven demand conditions across end markets amid weak global economic growth, says Moody's Investors Service in a new report.
Moody's report, titled "Chemicals -- Europe: Resilient Operating Profitability Supports Credit Quality, but Event Risk Is Rising", is available on
"Despite a challenging macro-economic environment, we expect that in 2016 European chemical companies' broad product and end-market diversification will enable them to retain most of the improvement in operating profitability and cash flow generation that they reported last year, when
EBITDA rose 11% in euro terms year-on-year on average," says Francois Lauras, a Moody's Senior Credit Officer and author of the report.
In 2016, Moody's expects that the peer group of 12 rated European chemical companies covered in the report will generate operating cash flows and sustain aggregate funds from operations (in euro terms) close to the EUR22 billion reported in 2015.
However, oil-induced deflation will weigh on companies' top lines while persistent overcapacities will give rise to further pricing and margin pressure at the commodity end of certain chemicals value chains. This will, for example, affect the basic chemicals and intermediates business of BASF (SE) (A1 stable), the C4 chain activities of Evonik Industries AG (Baa1 stable), Arkema's (Baa2 negative) acrylics business and Lanxess AG's (Baa3 stable) synthetic rubbers operation.
Moreover, as opportunities to grow revenues and earnings organically dry up in the current low global growth environment, the pressure on chemical companies to pursue large cash and debt-funded M&A transactions will increase. Such deals could weaken chemical companies' financial profiles and place negative pressure on their ratings.

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