Fitch Affirms Braskem's IDR at 'BB+'; Outlook Revised to Stable

Business Wire, Jan 21, 2009

RIO DE JANEIRO & CHICAGO -- Fitch Ratings has affirmed Braskem S.A. (Braskem) and Braskem International's ratings as follows:

Braskem

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

--Local currency long-term IDR at 'BB ';

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

--Unsecured senior notes due 2014, 2017, 2018 at 'BB ';

--Unsecured senior perpetual bonds at 'BB ';

--13th debenture issue at 'AA(bra)'.

Braskem International

--Unsecured senior notes due 2015 at 'BB '.

The Rating Outlook for the corporate ratings is revised to Stable from Positive.

The Outlook revision reflects Braskem's relevant increase in leverage during 2008 and the more challenging environment for the company's business and the petrochemical industry worldwide in 2009. The reduction of financial leverage, previously expected by Fitch, was not achieved and is not expected to occur in 2009 to reach measures commensurate with an investment grade rating.

Despite the challenging operating environment, Fitch expects that Braskem will be able to manage its liquidity, reduce leverage and adjust its new investments in accordance with its operational cash generation. The severity and duration of the economic slowdown as well as new capacity additions in the worldwide petrochemical market have lead to an uncertain demand and price scenario for petrochemical products over the next two years. These important challenges could limit Braskem's capacity to reduce leverage and restrict liquidity, which could pressure credit quality over the medium term.

Braskem's performance is strongly dependent on the Brazilian economy as around 85% of its revenue is generated by the local market although its prices are benchmarked to the international market. Fitch expects that the Brazilian economy will experience moderate growth in 2009, around 2.3%. Fitch also expects Braskem will continue to benefit from cost savings following the consolidation of Ipiranga Group's petrochemical assets and the expected outcome of negotiations with its main raw material supplier of Naptha, Petrobras, which could positively impact operational cash flow generation.

The ratings reflect Braskem's leadership position in the Brazilian and Latin American petrochemical sector. The company's ratings are also supported by its strong liquidity, moderate leverage, compensated by an extended debt payment profile, and solid, albeit volatile, operational cash flow. Integration of its activities gives Braskem a competitive advantage within the region's petrochemical industry. In recent years, Braskem has consolidated its leadership position in the Brazilian industry, obtaining a market share in thermoplastic resins of more than 50%. It has also strengthened its corporate and business structure with Petroleo Brasileiro S.A.'s (Petrobras) minority ownership interest. Fitch rates Petrobras' Foreign Currency IDR 'BBB' and Local Currency IDR 'BBB ' with a National Rating of 'AAA(bra)'.

There are uncertainties regarding the extent of the slowdown in the Brazilian economy in 2009 and its effective impact on national industry and on Braskem's business. The coming months will be important to have a clear definition about the scenario for Brazilian petrochemical, since Q3'08 showed a strategic move to reduce inventories in the petrochemical chain and the fourth quarter is seasonally weaker. The depreciated exchange rate up to September also resulted in an large increase in imports. The current appreciation of the USD is expected to favor import substitution and Braskem's competitive position.

Braskem's credit metrics are weak for the rating category. Braskem's ability to return its metrics to prior levels will be key to maintaining its ratings at current levels. The combination of lower cash flow generation and increased indebtedness deteriorated Braskem's credit metrics in 2008. The strong devaluation of the BRL in Q3'08 (20%) directly impacted the amount of its foreign currency obligations, while EBITDA (LTM) did not yet fully incorporate the effective gains. The total debt/EBITDA ratio reached 4.3 times (x), versus 2.6x for fiscal year (FY) 2007 (in USD 3.9x versus 2.9x). The net debt/EBITDA ratios were 3.5x and 1.9x, respectively (in USD 3.2x versus 2.1x). The interest coverage ratio was 5.6x for FY 2007 and 4.2x for the 12 months ended Q3'08.

Braskem generated BRL2.2 billion in funds from operations (FFO) and BRL2.4 billion in EBITDA for the 12 months ended Q3'08, a decline of 7% and 25% compared with 2007. The company reported an EBITDA margin of 13%, compared with 17% in 2007 and an average of 18% for the past four years. Its margins remain strong compared with the global petrochemical industry. The loss in margin in 2008 reflects negative factors, such as high raw material costs, strong appreciation of the BRL and a weakening of external demand.

Braskem's liquidity remains substantial and fundamental to support the rating. At Sept. 30, 2008, Braskem reported BRL1.8 billion in cash and marketable securities. For the end of the year, Fitch expects a higher cash position due to expected decrease in working capital needs over the 4Q'08. At Sept. 30, 2008, Braskem reported total debt of BRL10.2 billion, with BRL1.2 billion of short term maturities. In 2008, the company was able to term out debt associated with the acquisition of petrochemical assets in 2007 (USD1.2 billion). During the year, the company placed a bond issue on the international market (USD500 million) due 2018 and a pre-export operation (USD725 million) due 2013. Looking forward, Braskem has a manageable debt amortization schedule with no significant bullet maturities.