BASF SE

The stable outlook reflects our expectation that cost savings and asset disposals will help recover adjusted FFO-to-net-debt to 35%-40% in 2020, despite the weak macroeconomic environment. We consider rating leeway as reduced. In addition, we believe targeted IPO prospects for the Wintershall Dea joint venture could release significant rating leeway if and when implemented. We believe that the portfolio realignments should support business resilience, and that company's financial policies targeted toward organic growth will remain consistent with the 'A' rating. We could downgrade BASF in case of further macroeconomic deterioration such that FFO-to-net-debt would not recover toward 35% by 2020. This could result from intensifying trade war conflicts, adverse Brexit effects, further deterioration in automotive market, or weakening chemical margins.

...Weaker macroeconomics result in tight credit metrics for 2019 BASF SE issued a profit warning in July 2019 guiding up to 30% decline in EBIT before special items for 2019. S&P Global Ratings anticipates adjusted EBITDA of about 8.5 billion this year, compared with 9 billion-10 billion it expected at the beginning of the year. This reflects mainly a contraction in the auto industry year-to-date, and a macroeconomic slowdown marked notably by continued trade conflicts between the U.S. and its trading partners, particularly China. The group's guidance and our forecast also include a decline in cracker margins in North America due to oversupply this year in addition to three major turnarounds, and a marked decline in isocyanate margins after past years high levels. We take into account therefore that these issues, mostly price-related in chemicals and materials segments, account for about 90% of the 2019 expected decline in profits. This translates into our forecast of adjusted funds from operations...

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