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BASF SE
Fitch Ratings has assigned a 'BBB+' rating to
Proceeds will be used to finance or refinance investments in Eligible Green Projects, including, but not limited to, costs associated with Dow's planned net-zero ethylene and polyethylene plant in
Key Rating Drivers
Diversification, Flexibility Moderate Cash Flow Risk: Dow's strong end-market and geographic diversification supports its credit profile. Dow is the second largest chemical company globally, after
Dow benefits from access to advantaged natural gas-based feedstocks, as well as the industry leading feedstock flexibility of its European assets. However, recent demand destruction in the European markets limits the benefits of this flexibility. Regardless, Fitch believes the company will benefit from this feedstock flexibility and ultimately maintain relatively resilient, through-the-cycle EBITDA margins in the mid- to upper-teens throughout the forecast period.
Dow generated over
Strong FCF Generation: Dow's consistent ability to generate strong FCF supports the rating. Since 2019 (including the pandemic and recovery), the company averaged
Financial Flexibility: With approximately
Polyolefins Exposure: With 51% of its revenue generated by the Packaging & Specialty Plastics segment, Dow has exposure to volatile olefin, polyolefin, and hydrocarbon feedstock prices which can introduce significant volatility to EBITDA margins. Fitch believes that the polyolefins market will remain relatively balanced throughout the forecast period. The return of existing polyolefin production from pandemic- and weather-related shutdowns and the addition of new announced capacity is balanced by virgin plastic demand for food packaging and consumer applications that is growing faster than GDP.
Sustainability Investments: Dow's 'Decarbonize and Grow' sustainability program should position the company to meet customer demands for low-carbon solutions and its own emission reduction goals. Dow is addressing sustainability on multiple fronts, working with partners on prospective investments including electrical ethylene steam crackers, a modular nuclear reactor, a net-zero ethane cracker in
The associated spend with these initiatives will depend on which projects are undertaken, but will likely average out to
Derivation Summary
Dow's size, product mix and cash flow/leverage profile compare favorably with investment-grade peers. Dow is the second largest chemical company globally, after
Dow is also larger than diversified chemicals and manufacturing peers
Additionally, while Dow's EBITDA leverage is expected to climb above 2.0x in 2023, Fitch expects the company's leverage to decline below 1.5x over the medium term. Dow's EBITDA leverage compares favorably with
Dow exhibits higher EBITDA leverage than Olin; however, Olin's lower leverage is reflective of its greater cyclicality. Dow's (cash from operations [CFO]-capex)/net debt is quite strong, historically in the 50% range and forecast to be above 30% in 2023 and 2024. This compares favorably with
Key Assumptions
Revenue decline of approximately 15% in 2023, with more pronounced weakness in electronics, architectural coatings, consumer and Industrial Intermediates & Infrastructure segments. Overall macro softness continues into 2024 with a modest recovery;
Fitch expects mid-single-digit growth thereafter, supported by investments in capacity expansions as well as a moderate recovery in 2024 that gains momentum in 2025;
Fitch-calculated EBITDA margins contract to approximately 13% in 2023, slowly recovering to the 16% range by 2026;
Capex, inclusive of 'Decarbonize and Grow' projects but excluding Dow's net zero ethylene cracker, approximately in line with D&A;
Dividends and share repurchases equal to approximately 65% of operating income, in line with management guidance;
No additional debt repayment.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA leverage sustained below 1.5x or EBITDA net leverage sustained below 1.0x;
Consistent generation of FCF and maintenance of FCF margins above 5%;
Continued track record of prudent and cashflow-linked capital allocation where balance sheet strength and liquidity are prioritized over shareholder distributions, particularly in times of stress.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage sustained above 2.3x or EBITDA net leverage consistently sustained above 1.8x;
Inability to maintain consistent FCF generation;
Deviation from financial policy where shareholder distributions are prioritized over debt reduction during weaker earnings periods.
Liquidity and Debt Structure
Robust Liquidity: As of
Issuer Profile
Dow is a global chemical company focused on the production of plastics, intermediate chemicals, coatings and materials. With approximately
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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