Research Update: BASF 'A/A-1' Ratings Affirmed; Outlook Negative On Lingering Strain On Metrics Despite Management's Countermeasures

COVID-19 impacts, weak auto markets, and unfavorable chemicals margins continue to weigh on German chemicals group BASF, leading us to forecast around €2.9 billion in EBIT before special items in 2020. In our base case for 2020, we now expect 27% funds from operations (FFO) to debt, as adjusted by S&P Global Ratings. This is similar to 2019 and still below expectations for the 'A' rating, despite management's efforts on costs, working capital, capex, and disposals. We believe that a disciplined financial policy will be essential to a recovery in FFO to debt to above 35% in 2021, helped by IPO prospects for Wintershall-DEA and by a prudent approach to dividends, considering that the market will recover only gradually. We

...- COVID-19 impacts, weak auto markets, and unfavorable chemicals margins continue to weigh on German chemicals group BASF, leading us to forecast around 2.9 billion in EBIT before special items in 2020. - In our base case for 2020, we now expect 27% funds from operations (FFO) to debt, as adjusted by S&P Global Ratings. This is similar to 2019 and still below expectations for the 'A' rating, despite management's efforts on costs, working capital, capex, and disposals. - We believe that a disciplined financial policy will be essential to a recovery in FFO to debt to above 35% in 2021, helped by IPO prospects for Wintershall-DEA and by a prudent approach to dividends, considering that the market will recover only gradually. - We are therefore affirming the 'A/A-1' ratings on BASF, and removing the ratings from CreditWatch negative, where we placed them on March 25, 2020. - The negative outlook reflects the possibility of a downgrade over the next 12 months, absent a recovery in FFO to debt...

Research Update