SSOE acquisition adds pressure

SKI Carbon Black (Mauritius) Ltd’s (Birla Carbon) refinancing risk will rise following its acquisition of Aditya Birla Group’s trading outfit, Swiss Singapore Overseas Enterprises Pte Ltd (SSOE), said S&P Global Ratings on 24 May 2019.

In view of this, S&P has lowered the long-term issuer credit rating on Birla Carbon to ‘BB-‘ from ‘BB’.

However, the stable outlook reflects S&P expectation that Birla Carbon will refinance its bank facilities and maintain resilient performance over the next 12 months.

“Birla Carbon’s need to refinance US$1.5 billion in loans by September 2020 adds to its refinancing and liquidity risks, in our view,” said S&P.

The company drew down US$135 million from an existing revolver credit facility and took additional short-term loans of US$275 million to fund the US$450 million SSOE acquisition.

“We believe Birla Carbon’s solid banking relationships will help it refinance its upcoming maturities.

“In our opinion, SSOE’s trade relationships and storage facilities will allow Birla Carbon to have greater control over its raw material procurement, especially in the United States,” it said.

The wider reach provided by SSOE via its extensive relationships with petroleum refineries in the US and the Middle East will also allow Birla Carbon to select and buy grades of oil optimum for its business.

However, the rest of SSOE’s predominantly trading operations do not provide significant diversification benefits to Birla Carbon, in our view.

Meanwhile, SSOE’s largely commodity trading business could add volatility to Birla Carbon’s business mix.

Birla Carbon is likely to remain concentrated in its commoditized and somewhat fragmented rubber-grade carbon black business.

“We see specialty carbon black as a niche diversification opportunity for Birla Carbon, with potential for higher margins,” said S&P.

The company’s share in this segment has been growing rapidly over the past few years, although it remains lower than that of peers.

“We view the carbon black industry, especially the tire and rubber black carbon segment, as inherently cyclical. Crude prices and automotive cycles can swing underlying demand and profitability.”

The SSOE acquisition will increase Birla Carbon’s leverage. S&P estimate the company’s ratio of funds from operations (FFO) to debt will drop to 16%-19% in fiscal 2020 and 2021 (years ending March 31), from about 20.4% in fiscal 2019.

S&P anticipates stabilizing revenue and resilient cash flows from carbon black operations will help improve Birla Carbon’s cash flow leverage over the next 12-24 months, in the absence of any further debt-fueled acquisitions or shareholder distributions.

The stable outlook on Birla Carbon reflects our expectation that the company will refinance its upcoming maturities over the next six to nine months supported by its improving leverage.

The company is also expected to be prudent in capital spending and make no outsized acquisitions or shareholder distributions.

Delays in securing refinancing for upcoming maturities could weaken Birla Carbon’s liquidity and credit profile. A cyclical slowdown in the global automobile market or oil-price swings could also lower Birla Carbon’s FFO-to-debt ratio to below 15% and weigh on the rating.

“We could also lower the rating if Birla Carbon makes any unexpected outsized capital spending, acquisitions, or dividends or other payments to minority shareholders,” said the global rating agency.

“We are unlikely to upgrade Birla Carbon unless the company secures long-term financing and commits to a more conservative financial policy with the FFO-to-debt ratio moving sustainably above 20%,” it said. fiinews.com