OREANDA-NEWS. Fitch Ratings has placed Solvay S.A.'s ratings on Rating Watch Negative (RWN) as follows:

- Long-term Issuer Default Rating (IDR) of 'BBB+' on RWN
- Long-term senior unsecured rating of 'BBB+' on RWN
- Short-term IDR of 'F2' on RWN
- EUR500m 6.375% subordinated hybrid bond rating of 'BBB-' on RWN
- EUR700m 4.199% subordinated hybrid bond rating of 'BBB-' on RWN
- EUR500m 5.425% subordinated hybrid bond rating of 'BBB-' on RWN

The RWN reflects Fitch's opinion that Solvay's announced USD5.5bn acquisition of US-based Cytec will push credit metrics away from levels consistent with a 'BBB+' rating as previously envisaged by Fitch. The agency expects to resolve the RWN by the end of 2015 when the acquisition is likely to be completed. The resolution of the acquisition may take place subsequent to six months in the future, with the completion of the refinancing expected in the next 12-18 months.

We expect the group's post-transaction credit profile to be commensurate with a 'BBB' rating as the issuer's leverage will be rebased well above the current negative guidance level of 2x. We expect Solvay to de-lever after the transaction towards 2.3x by end-2018 from an expected 2.8x at end-2016. Our view on Solvay's post-acquisition IDR and Outlook incorporates the improvements in Solvay's operational profile and EBITDA margin as a result of the acquisition.

KEY RATING DRIVERS
Leveraging on Cytec Acquisition
In July 2015 Solvay announced its plan to acquire US-based composites producer Cytec (USD2bn turnover and 20% EBITDA margin) by the end of this year. Solvay plans to fund the acquisition with USD5.8bn (EUR5.2bn) bridge financing which will likely be replaced with EUR1.5bn equity, EUR1bn hybrid bond and EUR2.7bn senior debt in 2016. The large debt-funded acquisition will increase Solvay's 2015 funds from operations (FFO) net leverage to around 5x as the USD5.8bn raised financing will not be compensated by Cytec's full-year consolidation in FFO metrics. We expect the leverage to reduce to 2.8x in 2016 and 2.3x-2.5x after 2016 on Cytec consolidation, earnings from projects in development and following the equity and hybrid issuance.

We expect the acquisition will improve Solvay's operational profile and will help Solvay maintain a well-balanced end-market and geographical diversification. From 2016 we expect the acquisition to add 17%-19% to sales at EBITDA margin of around 20%, increase exposure to speciality chemicals which cater for automotive and aerospace markets and moderately increase Solvay's sales in North America at the expense of the Asia Pacific region.

Weak Commodity Markets
Weaker oil and other commodity markets negatively affected Solvay's 1H15 performance although it remains robust due to strong diversification, focus on value-added products and favourable currency effects. Our prudent assumptions expect a weaker oil market, decelerating Chinese market and acetow market contraction to protract into 2H15 weighing on overall volume and price declining trend, both expected at 2%-3% level. The latter is expected to be balanced by the continued currency gains on a stronger US dollar. From 2016 we expect volumes recovery broadly in line with regional GDP trends while prices are conservatively assumed flat.

Our base case for FY15 EBITDA margin is that it will increase to 17.1% (FYE14: 16.4%) as a high single-digit positive currency effect offsets volume drop on acetow and oil & gas markets, and price pressure stemming predominantly from commodity markets. We expect the margins further grow in 2016-2018 towards 18% on soft commodity market recoveries, Cytec consolidation and synergies, as well as a positive effect from Solvay's projects launching in 2015-2016.

Reduced Exposure to PVC
Solvay continues to follow its strategy to divest its chlorovinyls business in Europe and Latin America. In particular, Solvay sold Benvic Europe in mid-2014, has transferred its other European PVC assets to the joint venture with Ineos and has divested Solvay Indupa PVC in Argentina. After Solvay exits the JV with Ineos in 2017, the group's exposure to low-margin PVC segment will minimise in line with its strategy to focus on specialty and value-added chemicals.

Pension Liabilities Weigh on Metrics
Recurring cash outflows associated with its material pension liabilities weigh on Solvay's FFO-based metrics, which compare unfavourably with those of similarly-rated peers. The pension funding gap grew to EUR3bn from EUR2.5bn during FY14 on lower discount rate applied to future pension obligations. In line with Fitch's methodology, our treatment of these obligations focuses on their cash impact. Our base case assumes annual cash contribution of around EUR200m (EUR180m in 2014).

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- 2%-3% volume and price decline in 2015 offset by a 6%-8% positive currency effect in 2015.
- Volume recovery in line with regional GDP trends and flat prices beyond 2015.
- Cytec acquisition funded with USD5.8bn bridge facility that is subsequently replaced with EUR1.5bn equity, EUR1bn hybrid bond and senior debt in mid-2016.
- No further material M&A activity.
- Capex to moderate to 8% in 2015 and fall slightly below 8% after 2015 (FY14: 9.3%).
- Dividends gradually increasing at mid-single digit level over the next years.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Removal of RWN: Cytec acquisition failure or material changes in the financing of the transaction leading to FFO net adjusted leverage returning to below 2x.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Completion of the acquisition in line with the terms and conditions currently envisaged resulting in FFO net adjusted leverage materially and sustainably above 2x.

LIQUIDITY AND DEBT STRUCTURE
Solvay has historically maintained strong liquidity as evidenced by EUR853m short-term debt set against reported EUR1,251m cash and equivalents and EUR2,050m committed undrawn credit facilities. Its liquidity headroom will deteriorate as it aims to raise bridge financing to fund its planned acquisition of Cytec in late 2015. However, liquidity pressure will likely be temporary as we expect Solvay to be able to raise longer-term debt and equity funding in order to maintain robust liquidity.