France-Headquartered Chemicals Producer SPCM #BB+# Ratings Affirmed Following Proposed Debt Outlook Stable

Stocks and Financial Services Press Releases Tuesday April 11, 2017 17:42
PARIS--11 Apr--S&P Global Ratings
PARIS (S&P Global Ratings) April 11, 2017--S&P Global Ratings today affirmed its 'BB+' long-term corporate credit rating on France-headquartered chemicals producer SPCM S.A. The outlook is stable.
We also affirmed our 'BB+' issue rating on SPCM's $250 million senior unsecured notes due 2022 (2022 notes) and its €550 million senior unsecured notes due 2023 (2023 notes).

At the same time, we assigned our 'BB+' issue rating and '3' recovery rating to the group's proposed $450 million senior unsecured notes due 2025 (2025 notes). The recovery rating on both the existing and proposed senior unsecured notes is '3', indicating our expectations of meaningful recovery prospects (50%-70%; rounded estimate: 55%).

We understand SPCM will use the proceeds of the proposed issuance to repay the outstanding amount under the 2022 notes. Once it has repaid the 2022 notes, we will withdraw our issue and recovery ratings on the notes.

The affirmation reflects our view that SPCM will continue its strong operating performance and cash flow generation, following increased stability in raw material pricing, stronger sales in the U.S. and China oil and gas markets, and single-digit growth in its end-markets.

The affirmation also reflects SPCM's plans to issue $450 million senior unsecured notes due 2025, and use the proceeds to repay the existing 2022 notes, as well as the outstanding amounts under its €350 million revolving credit facility (RCF; approximately €100 million at close of transaction). We understand that the proposed notes will rank pari-passu with SPCM's existing senior unsecured notes.

We forecast that the increase in gross debt will push adjusted debt to EBITDA to approximately 3.0x at year-end 2017, before improving toward 2.5x over 2018 and 2019. Similarly, we forecast weakening in funds from operations (FFO) to debt in 2017 to 20%-25%, before strengthening toward 25%-27% in 2018 and 2019.

The improved credit metrics will stem from SPCM's strong cash flow generation and its planned amortization payments. However, partially offsetting these positives are working capital outflows that we forecast at €35 million-€45 million per year and projected capital expenditures (capex) of approximately €250 million in financial 2017. We do not forecast any material acquisitions or dividend payments.

SPCM's business risk profile is supported by the group's market leadership in polyacrylamide polymers used to treat municipal and industrial water and to alter the viscosity of water injected into tight oil and gas developments.

SPCM is the world's producer of polyacrylamides, reporting a 45% share of global production capacity at year-end 2016. SPCM's resilience to GDP cyclicality is primarily supported by its exposure to municipal and industrial water treatment end-markets, and more fundamentally by the increasing scarcity of clean water and natural resources.

Some constraints affecting SPCM's business risk profile include its limited product diversity in what we view as a niche market, ongoing sizable expansionary capex, and the presence of several competitors, notably in China.

Our assessment of the group's financial risk profile reflects its continued focus on growth and subsequent funding needs for capex and working capital, along with its highly cash generative nature, with maintenance capital requirements of only 1.5%-2.0% of revenues. Furthermore, we recognize the highly flexible and modular nature of SPCM's capex and its track record of prompt capex curtailment if needed.

The stable outlook reflects our view that SPCM's operating performance will remain resilient in 2017, with an adjusted FFO-to-debt ratio at about 25%, which we view as commensurate with our 'BB+' rating on the group. We understand that SPCM plans to reinvest all cash flows into business growth. However, we recognize the modular nature of capex and management's willingness and ability to cut investments in the event of unsupportive business conditions.

We could lower our ratings if we observed that SPCM's FFO-to-debt ratio had weakened to below 25% without clear prospects of recovery. This could occur, for example, as a result of declining EBITDA after lower sales from the oil and gas industry, higher-than-anticipated capex, or unforeseen acquisitions.

We are unlikely to raise our ratings on SPCM at this stage, reflecting our forecast of neutral to negative free operating cash flow in 2017-2018 as SPCM reinvests a significant proportion of its FFO into expansionary capex.

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