Fitch affirms Lafarge at ’BBB-’; outlook Negative

Fitch affirms Lafarge at ’BBB-’; outlook Negative
Published: 25 June 2010

Fitch Ratings has affirmed Lafarge’s Long-term Issuer Default (IDR) and senior unsecured ratings at ’BBB-’. The Outlook on the Long-term IDR is Negative. Lafarge’s Short-term IDR has been affirmed at ’F3’.
The Negative Outlook continues to reflect Lafarge’s limited headroom within the current ratings and the challenges it will continue to face in the foreseeable future to improve credit metrics, as market conditions are likely to remain difficult in mature markets, especially in western Europe. The ratings could come under further pressure if a deterioration in trading conditions leads to a material weakening in cash flow generation and, ultimately, slower deleveraging. Conversely, further measures to reduce debt or a gradual improvement in trading conditions in Lafarge’s main mature markets, resulting in an acceleration of deleveraging could lead to the Outlook being changed to Stable.
Lafarge’s ratings continue to reflect its strong business profile, including a solid position in the international building materials industry, notably its leading global position in both the high-margin cement sector and its complementary product portfolio. The group’s position is supported by its geographical diversification and established presence in mature markets, and increased exposure to fast-growing emerging markets. Satisfactory liquidity and a balanced debt maturity profile also support the ratings.
Fitch’s latest forecast assumptions for Lafarge include flat revenue in 2010 and low single-digit percentage revenue growth in 2011. EBITDA margins are expected to improve slightly due to cost-cutting measures. Cash flow from operations (CFO) is expected to be lower in 2010, due to the reversal of the sizable working capital inflow reported in 2009. Under this scenario free cash flow margin (free cash flow/revenue) should be breakeven or slightly positive in 2010. Fitch forecasts funds from operations (FFO) net leverage above 4.5x at FYE10, which is high for the current ratings and does not leave any headroom for under-performance. In its forecasts the agency has factored in lower disposal inflows in 2010 than in 2009.