Fitch affirms Holcim at 'BBB'; Outlook Stable

Fitch Ratings has affirmed Holcim Ltd's (Holcim) Long-term and Short-term Issuer Default Ratings (IDR) at 'BBB' and 'F2', respectively. The Outlook is Stable.

"The affirmation reflects Holcim's leading market positions as one of the world's largest cement producers and our expectation that its financial profile remains commensurate with its 'BBB' rating. We expect a recovery in global end-markets, particularly in developed markets, and the continued healthy, albeit slowing, growth in emerging markets to support internally generated cash flow. Coupled with a reduction in capex, we expect credit metrics to improve in line with our guidance for the ratings over the next 18 months," according to Fitch.

Key rating drivers

BBB Business Profile
The rating's agency explains that Holcim's IDR reflects the company's strong market position in cement, aggregates and concrete, and its wide geographical diversification, with a balanced mix between developed and emerging markets. The intended merger between Holcim and Lafarge will create the world's largest building materials company. It will hold number one market positions in cement, aggregates and ready-mix products and benefit from the individual companies' complementary asset base in Latin America and Africa & Middle East.

Solid operating results
Operating margins in 2014 remained solid and the EBITDA margin was in excess of 20 per cent, excluding restructuring and merger-related costs. The cost-cutting programme is well underway, with CHF1.8bn savings achieved over the past three years. However, leverage metrics deteriorated, due to a change in consolidation and currency fluctuations, resulting in net debt at year-end of CHF9.6bn (adjusted for EUR1bn of operating cash). Fitch expects credit metrics to improve in line with its guidance for the ratings over the next 18 months, thanks to a reduction in capex from CHF1.9bn in 2014 to CHF1.5bn.

Merger progress
The group successfully passed major hurdles in its merger process with Lafarge, including the successful renegotiation of terms and announcement of a new CEO, EU regulatory approval and the announced EUR6.5bn asset sale to CRH in a single deal, reducing the inherent transaction risk. While shareholders still need to consent with a two-thirds majority at an extraordinary shareholder meeting on 8 May 2015, Fitch's base rating case reflects the completion of the merger mid-year, as the strategic and operational rationale remains intact.

Adjustments for Indian subsidiaries
Holcim fully consolidates its Indian subsidiaries, ACC Ltd and Ambuja Cements Ltd, of which it held 50.3  and 50.4 per cent at end-2014, respectively. Fitch proportionally deconsolidates EBITDA and funds from operations (FFO) of Holcim's Indian entities, according to the interest Holcim owns in them.

Key assumptions

Fitch's key assumptions within our rating case for the issuer include:
• Completion of the intended merger with Lafarge and asset sale to CRH in 2015
• Low single digit revenue growth driven by slow global recovery
• Margins broadly stable at around 20%
• Sustainable expansion capex of CHF400m to CHF500m annually, maintenance capex of about CHF700m to CHF800m per annum
• Dividend policy to remain consistent with previous years' approach.

Future developments that could lead to positive rating actions include:
• Pro-rata FFO adjusted gross leverage improving to below 2.5x and net leverage to below 2.0x (4.2x and 3.8x at end-14)
Pro-rata consolidated free cash flow (FCF) materially positive (CHF-170m in 2014).