Fitch Ratings has downgraded Lafarge’s Long-term Issuer Default Rating (IDR) to ’BB+’ from ’BBB-’. The Outlook is Stable. The agency has simultaneously downgraded its Short-term IDR to ’B’ from ’F3’ and senior unsecured rating to ’BB+’ from ’BBB-’.
The downgrade reflects Fitch’s view that the group will not achieve the expected improvement in credit metrics in 2011 and 2012, due to the ongoing difficult market situation in the cement industry. The agency expects Lafarge’s credit metrics to remain at a level that is not compatible with an investment grade rating. The Stable Outlook reflects the agency’s view that trading conditions in the cement and construction businesses will remain tough in 2012, especially in Western Europe and North America. Fitch expects Lafarge to continue to deleverage, but not as fast as was previously expected. In particular, Fitch expects funds from operations (FFO) net leverage to remain above 4.0x in 2011 and 3.5x in 2012.
The agency notes that Lafarge implemented a number of successful measures to reduce debt, such as working capital control, a cut in the dividend, the decline of capex and the disposal of non-core assets. In particular, the disposal of non-core assets, including most of the gypsum businesses, should contribute to the reduction in debt by more than EUR2bn in 2011. As a result of these measures Fitch expects Lafarge’s net debt to fall to below EUR12bn in 2011, in line with targets. Notwithstanding this reduction, however, the continuous deterioration of trading conditions will not allow for a sufficient recovery in credit metrics.
In 9M11 the price increases in cement and the cost savings achieved by Lafarge (EUR150m in 9M11, in line with the EUR200m target for 2011) were not sufficient to offset the high cost inflation. This resulted in a decline in profitability in almost all geographies, with the exception of Central and Eastern Europe and Latin America, with operating income dropping by 12% YoY. Fitch expects the group’s cash from operations (CFO) to improve in Q411, thanks to the normal seasonal working capital reduction. However, the agency expects CFO for 2011 to remain below 2010 levels and the CFO net leverage ratio to improve only marginally from the 4.7x (adjusted for the one off-payment of the fine in the gypsum division) as of December 2010.
A further deterioration in trading conditions, affecting operating cash flow and resulting in a sustained negative free cash flow (FCF), in a funds from operations (FFO) fixed charge cover ratio below 3.0x and a FFO net leverage constantly above 4.0x, would put negative pressure on the ratings.
An improvement in the operating performance, allowing Lafarge to maintain positive FCF on a sustained basis and a FFO fixed charge cover ratio consistently above 3.5x and faster deleveraging, achieved via operating cash flow or extraordinary measures or disposals, with FFO net leverage improving to below 3.5x, could lead to a positive rating action.
Fitch expects Lafarge’s liquidity profile to remain solid and the debt maturity profile to be well-balanced. At September 2011 Lafarge had cash of EUR2.0bn and undrawn committed facilities of EUR3.0bn vs. debt maturities of EUR2.1bn for the following 12 months.
Lafarge’s ratings continue to reflect its strong business profile and solid global market positioning in the cement industry and in related building materials markets. The group’s position is supported by its above-average geographical diversification, with presence in more than 70 countries. Lafarge benefits from a well-established presence in mature markets and increased exposure to fast-growing emerging markets. Its EBITDA margin remains among the highest in the sector.