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Fitch Affirms Ratings of Brazil's Braskem; Outlook Positive

Posted on: Tuesday, 15 January 2008, 18:00 CST

Fitch Ratings has affirmed the ratings of Braskem S.A. (Braskem) and Braskem International. The Outlook remains Positive.

Braskem S.A.:

--Foreign currency Issuer Default Rating (IDR) at 'BB+';

--Local currency IDR at 'BB+';

--Senior unsecured notes 2008, 2014 at 'BB+';

--Senior unsecured Perpetual Bonds at 'BB+';

--Senior unsecured notes 2017 at 'BB+';

--National rating at 'AA (bra)';

--Debentures 13th Issuance at 'AA (bra)'.

Braskem International

--Senior unsecured notes 2015 at 'BB+'.

The Positive Outlook reflects an expectation that Braskem will be capable of increasing its cash flow generation and capturing relevant synergies, following the strategic acquisition of petrochemical assets of the Ipiranga Group in March 2007. Over the medium- to long term, the company's leverage should decrease, reflecting an increase in EBITDA. However, the programmed investments may slow the rate of this improvement. Fitch believes that the rate at which Braskem is able to reduce leverage will be fundamental to a potential upgrade to investment grade.

The ratings reflect Braskem's continued leadership position in the Brazilian and Latin American petrochemicals sector. Braskem's ratings are also supported by the company's moderate leverage, strong liquidity, adequate debt composition, financial flexibility and solid, but highly volatile, operating cash flow. Integration of its first- and second-generation activities provides the company with a competitive advantage within the Brazilian industry, and has allowed Braskem to achieve substantial synergies, lower costs and higher-than-average EBITDA margins compared to similar local and international peers.

Despite challenges associated with increased naptha costs, the company should be able to pass on the adverse effects of a higher cost structure. Fitch expects that the costs of raw materials derived from oil and natural gas prices will continue to be volatile in 2008 and that the passing on of naphtha costs and maintenance of current spreads and operating margins will continue to be one of the company's main challenges. Meanwhile, important factors such as the probable continued growth of the national economy, a reasonable balance between the supply and demand for petrochemical products, high utilization rates of production capacity and strong demand in the principal consumer sectors that use plastics (civil construction, packaging, consumer goods) are expected to contribute to possible increased naphtha prices being passed on.

Over the past 10 months, Braskem has consolidated its leadership position in the Brazilian petrochemical industry, obtaining a market share of over 50% in thermoplastic resins. It also strengthened its corporate structure and businesses following the recent announcement of an agreement with Petrobras (Fitch LT IDR of 'BBB-' and National scale of 'AAA(bra)') to exchange petrochemical assets for an increased shareholder participation, which increased Petrobras' holdings from 8.1% to 25% in Braskem's total capital. The consolidation of important petrochemical assets bolstered the company's cash generation without incurring increased leveraging, thus favoring an improvement in its credit ratios. In the 12 months ended third-quarter 2007 (3Q07), the company generated EBITDA of BRL3.1 billion versus BRL1.6 billion in fiscal 2006. The EBITDA margin rose from 14% to 18% due to improved conditions for passing on costs.

The proposed investment program in Venezuela (to build new petrochemical plants) could limit Braskem's future capacity to reduce debt. Total investments are projected of USD3.5 billion, to be divided equally between Braskem and Petroquimica de Venezuela S.A (Pequiven) for the construction of a polypropylene plant (450 thousand tons) and a cracker (1.3 million tons) in Venezuela. The project will be 70% financed through project finance and the remaining 30% from shareholder capital support in equal proportions. The internationalization of its plants could add new risks due to the company's investments in a country with a higher sovereign risk than that of Brazil.

Braskem continues to have substantial liquidity, with BRL1.7 billion (USD835 million) in cash and marketable securities at Q307. At same period, Braskem's total debt was BRL6.8 billion (USD2.9 billion). At the end of the process of acquisition, which should end on March 2008, Braskem's total debt is expected to be near BRL9 billion (USD5 billion), total debt/EBITDA ratio, 2.7 times (x), and the net debt/EBITDA ratio, 2.3x. In 2008, Fitch expects these ratios to remain close to 2.6x and 2, respectively.

Braskem is the largest petrochemical company in Latin America. In the last five years, the company has grown due to the integration of petrochemical assets located in the Camacari (Bahia) and Triunfo (Rio Grande do Sul) petrochemical parks. In the Bahian Park, the assets encompass Copene Petroquimica do Nordeste S.A, OPP Quimica S.A, Polialden Petroquimica S.A, Trikem S.A, Nitrocarbono S.A and Politeno S.A. In the Rio Grande Park, they consist of Ipiranga Petroquimica S.A, Ipiranga Quimica S.A, Copesul S.A., and OPP Quimica S.A Following the recent corporate changes at Nov. 30, 2007, Braskem became controlled by Odebrecht/Norquisa (60.3% total capital), Petrobras (30% total capital) and the Capital Market (9.4% total capital).

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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