For the 20 largest EMEA chemicals issuers S&P Global Ratings has ratings on, ratings headroom has become a key credit factor following a challenging first-half 2020 that included the COVID-19 pandemic and resulting significant market deterioration. Relative to other sectors, such as autos or aerospace, the impact on chemicals has been overall more moderate, not least due to the sector's end-market diversity and essential status that allowed for continued production during the various lockdowns. Meanwhile, management teams responded quickly and implemented proactive self-help measures such as delaying or reassessing discretionary capital expenditure, reducing shareholder distributions, and maintaining robust working capital management to protect credit quality and liquidity. The sector has entered a slow economic recovery, although risks remain.

We downgraded only two issuers of the mostly investment-grade companies covered in this report since the pandemic's arrival in February. For about half of rated companies, mainly from subsectors such as industrial gases, fertilizers, and specialty chemicals, we continue to view rating headroom as healthy under our baseline forecast. For the other half, including issuers active in the petrochemical industry or with particularly high exposure to cyclical end-markets such as construction or autos, rating headroom has fallen significantly and companies have limited leeway to absorb further weakening of demand. Consequently, the negative outlook bias has significantly increased since year-end 2019 despite relative rating stability so far.

What To Look For In 2021

We believe markets will not recover to pre-pandemic levels before 2022.   For 2021, we expect a rebound from depressed levels, but believe that recovery will be protracted and staggered. Amid this uncertainty, revenue and EBITDA of the top 20 EMEA chemical companies will still be up to 10% below 2019 levels on average. We believe the recovery in China as a main growth market for many global chemical companies will be a key ratings factor. We don't foresee a full recovery in chemical companies' revenue and EBITDA until 2022, particularly for those more exposed to commodity products, cyclical end-markets, and polyolefins in particular, because we expect spreads to remain subdued on large capacity additions.

Our forecasts suggest, however, that many of the top 20 chemical companies could restore credit metrics to 2019 levels by end-2021.   This is thanks to supportive financial policies and resilient free cash flow. We forecast average funds from operations (FFO) to debt of 33% and debt to EBITDA of 3x in 2020, a relatively moderate deterioration compared with 2019's 39% and 2.7x, respectively. For 2021, we forecast average FFO to debt recovering to 42% and debt to EBITDA of 2.4x in 2020 on average.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

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Issuer Review

Akzo Nobel N.V. (BBB+/Stable/A-2): Ample headroom under the rating

Analytical contact: Oliver Kroemker.  In our view, AkzoNobel has ample headroom for the rating despite some pandemic-related issues. We anticipate that the company's adjusted FFO to debt should exceed the 45%-60% range we view as commensurate with the 'BBB+' rating through 2021 under our base-case scenario. This compares with 47.5% at end-June 2020, which we view as the seasonal low, exacerbated by the pandemic-related effects. In first-half 2020, AkzoNobel's sales declined by 13% from a sharp decline in volumes in its decorative paints business and even more pronounced in its performance coatings business. This was partly mitigated by strong margin management and cost savings initiatives (which is en route to achieving €120 million of structural savings in 2020). Already in second-quarter 2020, AkzoNobel saw some easing of market headwinds and positive sales momentum, with paints recovering faster than the company's planning assumptions and faster than coatings due to this segment's exposure to some cyclical end-markets such as auto and aerospace. For third-quarter 2020, AkzoNobel announced revenue close to the previous years' quarter (on a constant-currency basis). In our base-case scenario, we factor in adjusted EBITDA of €1.2 billion-€1.4 billion for 2020 (compared with first-half 2020's €583 million) and €1.4 billon-€1.6 billion in 2021. The company continues to benefit from its low-capital-intensive business model, robust cash, working capital management, the resulting strong free cash flow, and management's commitment to the rating, including a target leverage of 1x-2x net debt to EBITDA at end-2020.

Arkema S.A (BBB+/Stable/A-2): Reduced rating headroom

Analytical contact: Gaetan Michel.  Despite strong free cash flow in second-quarter 2020, the challenging context linked to COVID-19 has reduced rating headroom of French Chemical Producer Arkema. We anticipate that the company's adjusted FFO to debt should stand close to 45% in 2020 versus the 50%-55% we forecast pre-COVID-19. This is still commensurate with the 'BBB+' rating because we anticipate stronger credit metrics in 2021-2022.

According to Arkema's second-quarter results, the company has had solid free cash flow of €288 million in second-quarter 2020, up from €90 million in second-quarter 2019. We understand the increase stems primarily from the strict working capital management in the context of lower sales and costs for certain raw materials. At the same time, Arkema's reported EBITDA stood at €286 million, down 30% compared with second-quarter 2019, largely driven by lower demand notably in intermediates. We expect demand to improve gradually in the second part of the year. We also believe the company is on track to its targeted €50 million fixed costs reduction from 2019 levels and to reduce capex by €100 million from planned levels. We view these measures as credit supportive and believe they should help the company cope with the challenging environment.

BASF SE (A/Negative/A-1): Very limited rating headroom

Analytical contact: Gaetan Michel.  We view rating headroom as very limited, as the negative outlook indicates. This reflects the possibility that we could lower the rating in the next 12 months owing to adverse market conditions, notably linked to the pandemic, deteriorating auto markets, and weaker upstream chemicals margins. Adjusted FFO to debt, which we expect at about 27% in 2020 and failing to recover from 2019 levels, has put the rating under significant pressure.

We anticipate BASF's EBIT before special items (company-defined) to reach about €2.9 billion in 2020, following notably the €226 million second-quarter dip. This reflects major volume losses in materials, surface technologies, and industrial solutions divisions; and significant price declines in upstream chemicals. We expect 2021 EBIT before special items to recover toward €4 billion, reflecting a moderate economic rebound and better resilience in agricultural solutions, nutrition and care, and industrial solutions. Key to the FFO to debt recovery in 2021 to above 35%, as per our base-case scenario, is the group's financial policy focused on cost savings, capex, working capital, and dividend control. This includes as well the first step IPO of Wintershall-Dea in 2021.

Borealis AG (BBB+/Stable/--): Comfortable rating headroom

Analytical contact: Gaetan Michel.   We view rating headroom for Borealis as comfortable, as the stable outlook reflects. This is despite our expectations of deteriorating credit metrics from weak polyolefin prices and higher debt following the acquisition of NOVA Chemicals' stake in Novealis. We now anticipate adjusted FFO to debt will decline to 37%-40% in 2020-2021, remaining well above the 30% downside threshold for the rating.

We have lowered our financial risk assessment, following our expectations of reported EBIDTA dropping by about 30% in 2020 coupled with dividends from Borouge declining to about €500 million from €650 million in 2019. Still, we anticipate Borealis' financial policy under the projected ownership and current gearing level to support the ratings, and do not expect more material releveraging transactions in the down-cycle environment. We also view positively Borealis' decision to discontinue the development of an integrated cracker and polyethylene project in Kazakhstan, and expect significantly lower dividend payments to shareholders through 2021. Finally, the new shareholding structure--whereby OMV will become majority shareholder while Mubadala will synthetically retain about 44% of Borealis (including indirect ownership)--will remain credit supportive for Borealis. We continue applying one notch of uplift to the rating on the company.

EuroChem Group AG (BB-/Positive/--): Lower earnings, but still deleveraging potential

Analytical contact: Lucas Hoenn.   We revised our outlook on agrochemicals producer EuroChem positive from stable in May 2020 on deleveraging potential. This is because we anticipate that ramp-up of production to nameplate capacity and the weakened ruble will support the company's operating performance in 2020-2021, despite soft prices for fertilizers. We forecast that EuroChem will also generate positive free operating cash flow as the company completes its large investment cycle and maintains adequate liquidity. While the spread of COVID-19 continues, EuroChem has maintained its operations and mining activities throughout first-half 2020. As it highlighted in August while announcing its first-half 2020 results, all plants continue to operate as normal, with ammonia and potash volumes production and operations ramping up at Kingisepp and at its two greenfield potash projects, Usolskiy and VolgaKaliy. Customers have experienced no significant disruptions to product deliveries. Sales reached $3.0 billion over the period, with sales volumes of 12.5 million metric tons (up 6% over the comparable period in 2019) and EBITDA of $830 million, a 1% increase. We continue to anticipate lower fertilizer prices in 2020 and a more challenging operating environment, leading to lower earnings but still-deleveraging potential. The positive outlook reflects our expectation that we could raise our rating on EuroChem in the next 12 months if the company maintains S&P Global Ratings-adjusted FFO to debt sustainably above 20%, demonstrates resilient operating performance, and adopts a proactive and ahead-of-time refinancing plan to address upcoming debt maturities in 2020-2021. While EuroChem did not proceed with its proposed Eurobond offering in first-half 2020 due to COVID-19-related uncertainty, it has progressed its debt maturity refinancing by securing other sources of financing. We expect it to continue its proactive approach to debt refinancing and strengthening its liquidity in the face of pandemic-related challenges and its still-large upcoming maturities in the next two years.

Evonik Industries AG (BBB+/Stable/A-2): Moderate headroom under the rating

Analytical contact: Oliver Kroemker.  In our view, Evonik has moderate headroom under its rating despite the market headwinds in first-half 2020 due to the pandemic. We anticipate that the company's ratio of adjusted FFO to debt will be in the 30%-35% range at end-2020, recovering further to 35%-40% in 2021. This is down from 40% at year-end 2019 but well within the range of 30%-40% we view as commensurate with the 'BBB+' rating. In first-half 2020, Evonik's Performance Materials business was mostly affected by weak demand and pricing for petrochemical derivatives, while its Nutrition and Care segment was resilient, due to its exposure to less cyclical end-markets and positive momentum in Animal Nutrition. The company further benefits from measures to support cash flow and adapt cost structures implemented in second-half 2019 and extended into 2020, and its ongoing structural efficiency measures such as its sales, general, and administrative cost program. In line with our macroeconomic scenario, we factor in a gradual recovery into 2021. We forecast €1.8 billion-€2.0 billion EBITDA for 2020, in line with Evonik's guidance for 2020 and compares with the €2.1 billion in 2019. The company's credit metrics should be supported by its strong focus on keeping or improving its cash conversion rate by cutting capex, strict working capital management, and lower bonus payments. We factor in strong FOCF of about €700 million in 2020.

Imerys (BBB-/Stable/--): Credit metrics have little headroom at the rating

Analytical contact: Ananita Jeanmaire.  Imerys's credit metrics have little leeway at the 'BBB-' level to absorb further weakening in end-market demand. Most of the company's operations are exposed to cyclical end markets such as construction (26%), iron and steel (13%), auto (11%), and industrial (13%). We expect this will likely result in reduced demand for Imerys' products and anticipate revenue to contract 10%-15% before returning to 3%-10% growth in 2021-2022. In light of this, the company's adjusted FFO to debt is set to be at the lower end of the 20%-30% range, commensurate with the rating, in 2020 before recovering to 24%-28% in 2021-2022. Nevertheless, we consider positively management's commitment to an investment-grade rating, as reflected in a prudent financial policy focusing on conserving cash in the currently uncertain environment. The company is reducing fixed and overhead costs, curbing capex, improving working capital management, continuing the roll out of Connect and Shape transformation program, and cutting cash dividend payments. Overall, we anticipate Imerys' cash deployment will fall significantly in 2020 and forecast discretionary cash flow of more than €200 million in 2020, up from 2019 levels.

Ineos Group Holdings S.A. (IGH; BB/Watch Neg/--): Under pressure in the next 6-12 months

Analytical contact: Ivan Tiutiunnikov.  Our rating on IGH combines our view on the company's stand-alone credit profile and the creditworthiness of the wider INEOS group. We view IGH as a core entity of the group. In the near term, the key rating stress will come from the group, following the ongoing acquisition of BP's petrochemical assets for $5 billion. We expect INEOS will finance most of the purchase price with debt, which could result in weaker creditworthiness for group. We understand that IGH will not be part of the transaction, provide financing, or guarantee new debt. Still, our rating on the company is driven by the group credit profile, and we reflect the potential weakness in the creditworthiness of the wider group in our CreditWatch negative placement.

IGH's stand-alone credit profile could also come under pressure in the next 6-12 months. While we expect that improving petrochemical prices and volumes in second-half 2020 will support annual EBITDA of €1.5 billion–€1.7 billion, compared with first-half 2020 EBITDA of about €630 million, and adjusted debt to EBITDA of 4.5x-5.0x in 2020, the risk of higher leverage is pronounced. At the end of second-quarter 2020, adjusted debt to EBITDA was already 5x on a historical cost basis, highlighting the lack of rating headroom. Still, despite the potentially higher leverage in 2020, our forecast of positive discretionary cash flow and gradual deleveraging in 2021 is the key support to the 'bb' stand-alone credit profile. We further note strong liquidity with undemanding maturity profile and ability to cut capex.

Koninklijke DSM N.V. (A-/Stable/A-2) Comfortable headroom under the rating

Analytical contact: Oliver Kroemker.  We anticipate that the recently announced transaction to sell its Resins and Functional Material's business for €1.4 billion in cash to Covestro AG will provide DSM with comfortable headroom under the rating once the transaction closes in first-half 2021. In our base-case scenario, we expect FFO to debt of about 55% in 2021, compared with the 35%-45% range we view as commensurate with the 'A-' rating. By year-end 2020, we anticipate DSM's leverage will weaken to the lower end of the 35%-45% range from 80% at year-end 2019, due to the recently closed, fully debt-financed acquisition of some assets of the Austria-based Erber group for about €1 billion and the smaller acquisitions of Glycom and CSK earlier this year and despite overall solid operating performance during the pandemic. The company benefits from its high exposure to the resilient nutrition and health markets (71% of 2019 reported EBITDA), which got a boost in demand due to COVID-19 and help mitigate the negative impact of the pandemic and recessionary environment on DSM's materials segment (29% of 2019 reported EBITDA). For 2020, we factor in slightly lower revenues and a 5%-10% decline in EBITDA for the group, still excluding the incremental EBITDA of the acquired Erber group assets. This compares with an average EBITDA decline of 15%-25% we forecast for the chemical companies we rate in 2020 and underpins the resilience of DSM's business model. With the challenging market environment and the Erber acquisition, management cancelled a remaining €255 million of its €1 billion share buyback program earlier this year, underpinning its commitment to the rating.

L'Air Liquide S.A. (A-/Positive/A-2): Comfortable headroom at the rating

Analytical contact: Oliver Kroemker.  We view rating headroom as very comfortable, as the positive outlook reflects. This indicates that we could raise the rating in 2021 if adjusted FFO to debt improves sustainably above 30%. The balance of management's priorities--improving cash flow versus investments and shareholder remuneration--along with explicit financial policy commitment, will be key rating factors.

We expect business resilience for the group's divisions to come geographic and end-markets diversity, the significant proportion of long-term contracts, growth in the health care segment, and exposure to defensive end-markets such as food and pharmaceuticals. We also expect margins to further increase this year supported by efficiency gains under the NEOS program, which we still expect to deliver €400 million by 2021. Leverage management will continue be driven by balancing of sizable and fairly predictable operational cash flows, with capex, dividends, and bolt-on acquisitions. The global recession will delay the group achieving its return on capital employed target of 10%, but we do not expect this to impair its ability to reach about 30% adjusted FFO to debt under our calculations.

Lanxess AG (BBB/Stable/A-2) Rating headroom will be limited in the near term

Analytical contact: Renato Panichi.   We anticipate that available rating headroom will be limited in the near term, owing to the pandemic's effects on profitability and credit metrics. In our base-case scenario, we expect Lanxess to maintain FFO to debt at about 30%-32% in 2020-2021—marginally higher than our downside trigger of 30%. Positively, the company's balance sheet benefits from the €780 million equity value achieved plus the €150 million profit participation (both pretax) from the disposal of its stake in chemical site service provider Currenta. In addition, the decision to suspend its €500 million share buyback program launched in March--of which the company has spent €37 million so far--should support credit metrics. In our view, management's actions are consistent with the company's commitment to maintaining an investment-grade rating. Furthermore, portfolio realignment and asset disposal are helping Lanxess navigate through the COVID-19-related downturn. An improved risk profile with reduced exposure to the auto industry, deferral in some portion of capex, operating expense saving initiatives, and proceeds from the Currenta sale Currenta support metrics during the pandemic. We expect EBITDA margin growth to be limited but less volatile in 2021-2022. Given sale of volatile segments such as ARLANXEO, the business is more resilient than it was during previous downturns, leading to less volatility in profitability. We expect growth in the EBITDA margin to be gradual beyond 2021. This also reflects our assumption of late recovery of some end markets such as the auto industry.

Linde plc (A/Stable/A-1): Solid headroom under the rating

Analytical contact: Oliver Kroemker.  In our view Linde has solid headroom under its rating despite some market headwinds from first-half 2020 due to the pandemic. We anticipate in our base-case scenario that the company's adjusted FFO to debt will reach at least 40% at end-2020 and beyond compared with a downside threshold of 30% we factor in at the rating. This underpins the resilience of its business model and stringent self-help measures such as cost mitigation, capex efficiencies, price, and working capital management. Linde labels 65% of its revenue as defensive--that is, protected by long-term contracts with fixed fee agreements or steady rental payments or generated in resilient end-markets such as health care, food, or electronics. Additional stability stems from the local nature of Linde's business in contrast to companies relying on or being part of international supply chains. Nevertheless, in first-half 2020, Linde's revenue declined by 10.5% compared with the same period a year earlier, following lower volumes and unfavorable currency movements. However, the company managed to deliver a slightly increased adjusted EBITDA of $3.9 billion compared with $3.8 billion in first-half 2019. This follows strong price management but more so the company's delivery ahead of its synergies schedule resulting from the Linde-Praxair merger. For 2020, we factor in adjusted EBITDA of about $8.0 billion (first-half 2020: $3.8 billion) and €8.5 billon-$8.9 billion in 2021. At the same time we anticipate Linde to generate strong free operating cash flow (FOCF) of $3.5 billion in 2020 (first-half 2020: $1.7 billion).

OCI N.V. (BB/Negative/--): Little headroom at the rating

Analytical contact: Wen Li.  With a negative outlook, OCI's credit metrics have little headroom at the rating. For fiscal 2020, we expect S&P Global Ratings-adjusted FFO to debt at below 16%, the threshold we view as commensurate with the rating. This is mainly from lower-than-expected selling prices across nitrogen fertilizer products and methanol. However, we expect metrics to improve in 12-18 months due to continuous increase in production volumes and a positive outlook for global nitrogen fertilizer and methanol end markets. COVID-19 has not had a direct impact on OCI's market demand or operations of the producer of fertilizer, which is essential to food production. Supply chains and distribution channels continue to perform resiliently. In first-half 2020, revenue increased 9.0% to $1.7 billion and our adjusted EBITDA increased almost 6.5% to $390 million. This derives from 26% higher production volumes, mainly from the full consolidation of Fertiglobe, a new JV with Abu Dhabi National Oil Co., adding 2.1 million metric tons per year of urea capacity. However, selling prices across OCI's products reached trough cycle levels in the second quarter, resulting in an about $120 million negative impact on EBITDA for the quarter. Net debt decreased by $222 million in the first half, supported by $168 million one-off cash-in for Fertiglobe closing settlement. With the completion of its growth capex program and limited scheduled turnarounds in the next 12 months, we expect to see healthy volume growth. We view improving supply demand balances as supportive for a moderate recovery in selling prices. Higher earnings and solid FOCF will lead to FFO to debt improving to above 20% by 2021.

Sasol Ltd. (BB/Negative/B): Limited headroom at the rating

Analytical contact: Omega Collocott.  Sasol, a global integrated chemicals and energy company with production facilities in Africa, Europe, the Middle East, and North America, has been materially and negatively affected by oil price declines and COVID-19. The company's credit metrics have limited headroom at the rating, and deleveraging in the coming 12-18 months relies on the successful implementation of measures including cost, working capital and capex rationalization, business optimization through an accelerated asset disposal program (of $2 billion-$3 billion), and a rights issue (of up to $2 billion). Management has implemented cost and capex reductions, cancelling dividend payments in 2020, and advancing the asset disposal agenda. Together, we view these actions as credit positive, with the potential to increase rating headroom. However, the impact on earnings of the announced asset sales, and the outlook for oil and chemical prices and the South African rand, is uncertain. For the current rating, we expect Sasol's S&P Global Ratings-adjusted weighted-average FFO to debt to remain above 12%, while our negative outlook reflects that lower-than-forecast cash inflow could push adjusted FFO to debt below this level. For fiscal 2020 (ended June 30), adjusted FFO to debt was 12%-13%.

A recovery in credit metrics is predicated on the company's operations contributing to cash flow in a more supportive oil and chemical price environment, together with the conclusion of planned asset disposals. In this regard, Sasol has classified net assets of about $4.8 billion as held for sale. These include selected U.S.-based chemicals assets, its Mozambique-South Africa gas pipeline, and the Secunda Synfuels air separation unit (ASU). The ASU's sale to Air Liquide is expected to generate net cash proceeds of up to 6.5 billion South African rands (about $400 million). On Oct. 2, 2020, Sasol also announced that it had reached an agreement to sell a 50% stake in its Lake Charles Base Chemicals assets to LyondellBasell for $2 billion. We expect both transactions to close in fiscal 2021. Discussions regarding disposal of other assets are underway. Sasol will also proceed with a rights issue during 2021, and intends to apply cash raised from divestments and an equity raise to repay debt, which we view as credit positive. Conservative financial policy and cash flow management, together with strong banking relationships continue to support the company's liquidity. Sasol's material exposure to South Africa caps the rating at two notches above the long-term foreign currency sovereign rating on the country (BB-/Stable/B).

Saudi Basic Industries Corp. (SABIC; A-/Stable/A-2): Strong credit ratios and significant headroom

Analytical contact: Rawan Oueidat.  SABIC has strong credit ratios, with significant headroom at the rating. We do not foresee a material risk of a negative rating action over the next 12-18 months, despite the weaker overall industry outlook from softer industrial production, weak economic growth, and slowing important end markets. The company benefits from gas feedstock supply from Saudi Aramco, with fixed gas price feedstock levels for Saudi methane and ethane fixed at $1.25 and $1.75 per million Btus, respectively. At the same time, we see the decline in oil prices weighing on SABIC's contribution margin per ton. Despite low-cycle conditions, we expect the company to remain one of the most profitable in the industry, supported by its scale, efficiency, and globally competitive gas feed stocks from Saudi Aramco. Even with a likely decline in 2020 EBITDA by 35%-40% from 2019 levels--due to pricing pressure on weak global demand and additional capacities coming online across key product lines, in addition to COVID-19-related uncertainties--we anticipate solid leverage levels, with adjusted debt to EBITDA of about 1.0x from 2021 onward as prices recover, further supported by delayed capex plans. In our base-case scenario, we anticipate a gradual recovery in second-half 2020 as restrictions ease. Notwithstanding the slowdown, we believe that a supply overhang will persist for many commodity chemicals. An escalation of trade disputes between the U.S. and both China and Europe are adding uncertainty and contributing to weakening chemical demand. SABIC's revenue for first-half 2020 declined 23% compared with first-half 2019, spurred by slower global growth due to restricted mobility, supply-demand challenges, and lower oil prices that further stressed petrochemical prices. Despite the weak industry outlook, we expect credit metrics to remain commensurate with the rating, absent significant mergers and acquisitions and modest capex plans. We don't expect the company to commit to major investment outlays given economic weakness, and has even announced plans to cut or delay capex. This includes SABIC's biggest growth initiative, the Saudi crude oil to chemicals project. We understand that the company is focusing on maintenance capex plans and projects nearing completion, rather than on growth plans.

Sibur Holding PJSC (BBB-/Negative/--): Limited rating headroom

Analytical contact: Oliver Kroemker.  We view Sibur's headroom under the rating as limited. The pandemic and related quarantine measures have resulted in significant global disruptions and demand shocks, a sharp decrease in oil and petrochemical prices, and depreciation of the Russian ruble (RUB). We anticipate Sibur'S EBITDA (including our adjustments) to decrease to RUB145 billion-RUB155 billion in 2020 from RUB170 billion in 2019. This follows a material decline in global feedstock prices and petrochemical product prices, mainly because of lower global demand, resulting in weaker profits from the Midstream segment and from the Plastics, Elastomers and Intermediates segment. This is only partly offset by higher contribution from the company's Polyolefins and Olefins division due to additional highly profitable volumes from the ZapSib project, which is ahead of its ramp-up schedule and starts meaningful contributing to Sibur's cash flow in 2020. The company developed plans to mitigate the repercussions on its business, including tactical supply chain management and measures to reduce costs and lower its investment program. Even under adverse market conditions, we expect it to sustain robust profitability, with an EBITDA margin of about 30%, one of the highest in our petrochemicals rating universe. Also, Sibur has maintained leverage over the past few years in line with its financial policy, despite major expansion projects. In our base-case scenario, we assume a gradual recovery in global economic conditions and the oil and petrochemical prices in 2021. The company's free cash flow should materially increase in 2021 and financial metrics will likely recover from temporarily subdued levels. Nevertheless, we calculate an average FFO to debt near the 45% level we view as commensurate for the rating, leaving limited headroom.

Sika AG (A-/Negative/A-2): Limited rating headroom

Analytical contact: Paulina Grabowiec.  We anticipate that the construction industry will be severely hit in 2020 by recession resulting from the pandemic, notably in Europe and the U.S., but that it will progressively recover in 2021. With about 80% of Sika's 2019 sales in the construction industry, and the balance from industry, transportation, and automation sectors, we believe the company's is significantly exposed to the disruption caused by the pandemic. Consequently, we anticipate that the Sika's deleveraging--following the acquisition of Parex--to a rating-commensurate FFO to debt of 35%-40% could be delayed to 2021. We note Sika's resilient growth in local currencies of 2.9% in first-half 2020, primarily from the 13.4% contribution from acquisitions, while organic sales declined by 10.5%. Reported EBIT (as defined by management) declined by 14.8% year-on-year, reflecting reduced operating leverage, efficiency measures, and integration costs related to the Parex acquisition. We expect the resilience of the company's sales will be supported by the refurbishment and renovation market, as well as government infrastructure stimulus programs. Sika's FOCF remained strong in first-half 2020, supported by reduced capex and a focus on working capital, although it did not fully cover a dividend payment, resulting in a moderate negative adjusted discretionary cash flow of Swiss franc (CHF) 86 million. Despite the limited headroom, as signified by the negative outlook, we acknowledge management's commitment to the 'A-' rating, demonstrated in the past by tangible actions, such as the issuance of a CHF1.3 billion mandatory convertible bond to support the CHF2.5 billion Parex acquisition.

Solvay S.A. (BBB/Stable/A-2): Limited headroom to absorb further deterioration

Analytical contact: Renato Panichi.  Solvay's resilient cash flow in first-half 2020 and solid balance sheet continue to support the ratings, despite pandemic--related issues. Nevertheless, we continue to assume the company's earnings will remain weak over the next few months. We anticipate Solvay's adjusted FFO to debt will stand at about 25% in 2020. This is still commensurate with the 'BBB' rating, although headroom for further deterioration is limited. The company's balance sheet benefits from €1.2 billion related to proceeds for the disposal of its polyamide assets stake. Solvay already used part of the proceeds to make additional voluntary contributions to pension plans, which should reduce pension liability volatility and ongoing service costs. It reported solid cash flow from continuing operations of €435 million in first-half 2020, comparing positively with €33 million in first-half 2019. We understand the increase stems primarily from the company's disciplined working capital management and reduced cash taxes. At the same time, Solvay's reported EBITDA was 16% less than first-half 2019, with second-quarter EBITDA down 30% compared with the same period in 2019. Lower volumes largely explain the drop in EBITDA, partially mitigated by cost reduction and positive pricing. We assume challenges will persist in second-half 2020, particularly in the third quarter, largely due to distress in the civil aircraft aviation and auto industries. This is partly offset, however, by the company's exposure to more resilient sectors such as consumer goods, health care, agriculture, feed, and food. We anticipate that Solvay's 2020 EBITDA (S&P Global Ratings-adjusted) should be about 20% lower than in 2019, but it might be weaker if the expected economic rebound in second-half 2020 is very slow. Instead, we believe that the company should generate cash flow roughly in line with 2019 levels, thanks to strict working capital and capex management.

Syngenta AG (BBB-/Stable/A-3): Ratings headroom could decline

Analytical contact: Renato Panichi.  We expect that the commitment of Syngenta's ultimate parent, ChemChina, to maintaining the company's credit metrics in line with an investment-grade rating could offset weaker stand-alone credit metrics. Syngenta's first-half results highlighted its resilience, despite challenging global conditions due to the pandemic, but persistent weak cash flow continues to test credit metrics and the rating. We anticipate that the company's adjusted EBITDA will be $2.2 billion-$2.3 billion in 2020, which is roughly in line with that of 2019. Syngenta has been less affected by the pandemic than other sectors because most governments consider agriculture and related industries essential, and so far, we have not observed significant disruption in supply chains. We anticipate that FFO to debt will be marginally lower than 17%-18% in 2020, although it will remain above our 12% trigger for a downgrade. Syngenta's FFO to debt weakened to 18.9% in 2019 from 23.1% in 2018. This largely reflects increased working capital balance, when adjusted for factoring, ahead of strong growth in Latin America, where credit periods are longer. As of June 30, 2020, factoring outstanding stood at $1.4 billion, up from $800 million at year-end 2019, which in turn doubled from $400 million in 2018. We will closely monitor the company's collection of receivables during second-half 2020. If operating performance and cash flow do not strengthen enough, ratings headroom could fall significantly.

Yara International ASA (BBB/Stable/A-2): Healthy rating headroom

Analytical contact: Paulina Grabowiec.  We anticipate that Yara's operating and financial performance in 2020 will be broadly immune to the pandemic's economic and health impact. The company performed strongly in first-half 2020, with reported EBITDA before special items of $1.1 billion, about 8% higher year-on-year. This was primarily from increased deliveries, significantly lower natural gas prices, and lower fixed costs, which more than offset lower realized prices for nitrogen and phosphate. Cash flow, supported by seasonal inflow of working capital, more than adequately covered moderate capex and dividend payments. We consider rating headroom healthy, and view Yara's 5% share buyback program--using part of the $1 billion of proceeds from the sale of its 25% stake in Qafco--as credit neutral. We understand the company's financial policy remains committed to maintaining at least a 'BBB' rating.

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Related Research

• EMEA Chemical Companies, Strongest To Weakest, Aug. 21, 2020
• Industry Top Trends Update: EMEA Chemicals, July 16, 2020
• Q&A: EMEA Chemicals Face A Long Climb Back From COVID-19 Disruption, June 29, 2020
• ESG Industry Report Card: Chemicals, Feb. 11, 2020