BASF SE

The stable outlook reflects our view of BASF's diversity and resilience. Its business comprises a substantial share of less volatile specialty chemicals, which should enable it to maintain FFO to debt around 35% over the next couple of years, balancing its exposure to more cyclical end-markets such as the automotive sector. We believe that the company's leeway for bolt-on acquisitions at the current rating level is reduced though following the recent series of acquisitions and due to potential slower GDP growth in North America and Europe, increased environmental concerns and softening demand in key end markets such as the automotive industry. We could downgrade BASF if it made a significant debt-financed acquisition, or there was a major global slowdown leading

...Near-term challenges and risks have limited BASF's rating headroom. Last December, BASF issued an earnings warning for 2018, indicating that earnings for the year would likely be lower than previously expected. This is due to a number of reasons including: sharper-than-expected price declines in isocyanates, lower cracker margins, operational issues due to low water levels of the Rhine river, as well as more macro-related factors, such as softening demand from the automotive sector since third-quarter 2018, and softer demand from Chinese customers, exacerbated by the looming trade conflict between the U.S. and China. Our revised forecast points to fund from operations (FFO) to debt of around 35% in 2018 and 2019, which is commensurate with the current rating, but leaves no headroom for further acquisitions in the near-term, or any significant underperformance to our base case. In the long run, the company should benefit from its ongoing transformation and cost optimization We see the company's...

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