Fitch Ratings said today that there will be no immediate rating impact on HeidelbergCement AG’s (HC) Long-term Issuer Default rating (IDR) of ’B’ following HC’s announcement on 13 September of a planned capital increase. The Outlook is Negative and HC’s and subsidiary Hanson plc’s senior unsecured debt remains at ’CCC’. The Recovery Rating on the senior unsecured debt is ’RR6’, reflecting poor recovery prospects in the event of a default, in light of high total debt levels and over 55% of total debt being secured. HC’s Short-term IDR remains at ’B’.
"While a capital increase would be positive for HeidelbergCement’s creditors, there is no certainty that the effort will be successful as the offering is not underwritten," says Elisabetta Zorzi, Senior Director in Fitch’s Corporate group. "Further, major refinancing risk persists with banks benefitting from a security package, complicating HeidelbergCement’s access to new funding."
HC plans to increase share capital by 50% through the issuance of 62.5 million new shares against cash contributions, in a private placement with institutional investors. No price has been set. The total proceeds will be used to partly repay the company’s existing indebtedness. This exercise is part of management’s effort to restore HC’s credit profile through measures including asset disposals and capital increase. In June 2009 HC obtained a EUR8.7bn secured syndicated loan agreement with maturity on 15 December 2011, mitigating the refinancing risk of the EUR5bn Hanson term B acquisition loan that had maturity in May 2010.
Fitch will monitor developments and assess the impact on HC’s credit profile following the settlement date expected on 9 October 2009. Positive rating pressure could occur depending on the amount of cash raised.
HC has also announced that concurrently with the placement of the new shares from the capital increase, up to 62.5 million existing shares held by the majority shareholder, the Merckle family and related entities as well as certain banks that hold shares in the company, will also be placed with institutional investors. The final amount to be placed is presently uncertain and will determine the extent of dilution of the current majority shareholder which, due to its own financial constraints, has weighed negatively on HC’s credit profile.
The Negative Outlook reflects Fitch’s view that the proposed capital increase might not be sufficient to achieve material debt reduction and that HC’s credit metrics will continue to be stretched. Sizable asset disposals are likely to be challenging in the coming 12 months given continuing difficult financial market conditions. The agency also views the concentration of the debt maturity profile in December 2011 as a key rating risk, especially in view of the complex creditor inter-relationship arising from the presence of secured lenders. In this context, access to debt capital markets may prove challenging. Fitch’s latest forecasts for HC include a potential mid-teen percentage point decline in revenue in 2009 and a flat performance in 2010, as well as deteriorating EBITDA margins in 2009 before a slight recovery in 2010. Under this scenario expected lower cash flow from operations is likely to result in only slightly positive free cash flow compared to a five-year average of 4% free cash flow/revenue.