MOSCOW (MRC) -- Moody's Investors Service, ("Moody's") has today assigned a Baa2 issuer rating to Covestro AG (Covestro). This is the first time that Moody's has assigned ratings to Covestro. The outlook on the rating is stable, said the agency.
The Baa2 issuer rating reflects Covestro's leading positions in the global polyurethane and polycarbonate markets, which are characterized by oligopolistic structures and significant barriers to entry reflecting high capital intensity and limited access to tightly held proprietary process technologies. Covestro's high performance plastics and engineering resins enjoy solid long-term demand fundamentals driven by a number of global megatrends, such as urbanisation, rising living standards and the need for improving energy efficiency.
While exhibiting some degree of product concentration (with about three quarters of its sales and two thirds of its profits generated by polyurethanes and polycarbonates), Covestro's portfolio enjoys significant geographical and end-market diversification reflecting the global footprint of its manufacturing and sales activities, and its ability to serve global customers in a wide range of applications.
Also, Covestro's cost position is underpinned by world scale production facilities located across the main three regions of Europe, North America and Asia and complemented by an extensive network of polyurethane systems houses and polycarbonate compounding facilities, efficient process technologies and backward integration into some key feedstocks such as chlorine and carbon monoxide, which are typically produced on site, and propylene oxide, for which there is no sizeable, liquid merchant market.
However, Covestro remains exposed to the volatility of raw materials, which account for more than 50% of its total cost of goods sold and include primarily petrochemical derivatives such as benzene and phenol, whose pricing is linked to the price of crude oil. Its ability to pass onto customers fluctuations in raw materials costs may be constrained by periodic demand/supply imbalances affecting the global polyurethane and polycarbonate markets arising mainly from extended investment cycles. In recent years, Covestro's financial performance has been affected by weak utilisation rates due to the rapid build-up of new capacity leading to intensifying competition, while trading conditions in polycarbonates were further depressed by the rapid decline in demand for optical data storage.
Looking ahead, while the start-up of additional capacity is likely to keep industry utilisation rates for polyurethanes under pressure in 2015-2016, we expect Covestro to grow future volumes by leveraging the production capacity recently added to its portfolio. Its future operating profitability should be further underpinned by the further optimization of its asset base, including the closure of the Belford Roxo MDI plant in Brazil and the consolidation of its TDI asset base in Germany, as well as a continuous focus on efficiency helping to generate savings in excess of fixed cost inflation.
Following the recent IPO, the capital structure of Covestro is positioned in line with its conservative financial policies, which target leverage as measured by reported net financial liabilities (including EUR1.5 billion of net pension liabilities) to EBITDA of 2.5x to 3.0x.
As MRC informed earlier, Covestro AG gained as much as 12% on the first day of trading after slumping global stock markets forced the plastics maker owned by Bayer AG to cut the size of its initial public offering by 40%.
Bayer is a global enterprise with core competencies in the fields of health care, agriculture and high-tech polymer materials. As an innovation company, it sets trends in research-intensive areas. Bayer's products and services are designed to benefit people and improve their quality of life. At the same time, the Group aims to create value through innovation, growth and high earning power. Bayer is committed to the principles of sustainable development and to its social and ethical responsibilities as a corporate citizen. In fiscal 2014, the Group employed 118,900 people and had sales of EUR 42.2 billion.