Fitch Ratings has affirmed
Fitch has also affirmed the rating of Bakelite's term loan at 'BB+'/'RR2'. The Rating Outlook remains Stable.
Bakelite's 'BB' rating reflects the company's leading market share in formaldehyde-based resins in both
The Stable Outlook considers Fitch's expectation Bakelite's leverage will return to below 4.0x by 2025 after remaining above that level in 2023 and 2024, as the company's construction and European exposure will likely weigh on its results in the short term. Additionally, Fitch expects that Bakelite will generate positive FCF over the ratings horizon through working capital release, moderate capex requirements and a manageable debt burden.
Key Rating Drivers
Expected Near-Term Weakness: Fitch expects Bakelite's EBITDA leverage to exceed 4.0x in 2023 and 2024 should a downturn materialize, as the company's exposure to home construction/remodeling (approximately 54% of gross profit) and
High Barriers to Entry: The resins sold in this industry are typically developed in close coordination with their customers, leading to products that are specified into their customer's process and products. Competitors in the space need to be able to continuously improve their products to meet customer manufacturing requirements. Bakelite has served most of their top 10 customers for 20+ years. In addition, formaldehyde-based resins have a high water content and a short shelf-life (approximately 4 weeks). This creates a maximum economic shipping radius of 200 miles. The incumbent players have locational advantages with facilities located in close proximity to customer's locations.
Raw Material Pass-Through: While Bakelite's raw materials exhibit price volatility, the company's resin pricing contracts remove much of it. Eighty-five percent of Bakelite's volumes are covered by contracts or pricing mechanisms that allow for raw material price pass-through. Key raw materials (phenol, methanol and urea) are tied to market-based indices and the resin price moves monthly based on published market changes. In addition, annual adjustments are made for other costs such as overheads, freight, and other raw materials.
Established Position in Rationalized Market: Pro Forma the GP Chemicals acquisition, Bakelite maintains a number two market position (with 27% of volume) in
Regulatory Tailwinds: Within the construction market there is growing emphasis on increasing use of cladding and insulating materials that exhibit favorable fire, smoke, and toxicity (FST) resistance. Phenolic resins can withstand high heat loads while maintaining mechanical strength and providing good FST resistance. Beyond the construction industry these features are highly sought after in the EV market where phenolic resins are used to supply battery boxes to EV automakers.
Phenol and Formaldehyde Exposure: Bakelite, as a formaldehyde-based resin producer, has exposure to formaldehyde, which has been classified by the
Derivation Summary
Bakelite is somewhat weakly positioned for its rating category. The company is smaller and maintains lower margins than peers such as
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
A recession in 2023 affects both volumes (down 9%) and pricing (down 8%). Volumes and pricing both grow at 2%-3% per annum thereafter;
Raw materials costs fall from the weaker economic environment but also from negotiated contract savings and procurement improvements, leading to flat material margin/ton in 2023. Materials margin/ton improves thereafter as market recovery supports better pricing;
Full realization of synergies expected in 2024;
Capex of
Fitch assumes bolt-on acquisitions of
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Significant increase in size and scale while maintaining conservative credit metrics;
EBITDA margins approaching the mid-teens through raw material procurement improvements and/or improved pricing power;
EBITDA leverage durably below 3.0x.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
EBITDA margins trending toward mid-single digits on a sustained basis, indicating the inability to successfully pass on raw material costs or operating inefficiencies;
A deeper, more prolonged downturn that leads to EBITDA leverage durably above 4.0x;
Large debt-funded acquisitions or aggressive sponsor distribution policies.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Bakelite maintains adequate liquidity of
Issuer Profile
Bakelite is a global integrated producer of phenolic specialty resins and engineered thermoset molding compounds used in building materials, automotive products, industrial applications and specialty chemical intermediates, with sales across multiple end markets in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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