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Lanxess: Cross Asset Reaction

BASIC INDUSTRIES
  • CDS 13bp wider (bbg).
  • Equity down ~6.5%.
  • Cash underperforming the wider market, but relatively stable at ~+1-2bp.
  • Dividend cut and asset sale were preannounced, Moody’s commented last year that the latter would not be enough to improve credit metrics alone. Management reiterated their desire to remain IG, answering that the grace period is normally around 18 months. We can see leverage coming down somewhat this year but not to 2.5x target. Margin requirements seem even more of a reach.
  • We feel it will take a significant macro improvement for LXSGR to hold onto the IG rating. Management talked up improvements to EBITDA, implying €100M+ improvements are possible, declined to put numbers on FCF guidance but indicated it should be “nice”.
  • LXSGR is already among the widest names in low BBB territory, wider than CE for example.
  • Despite the valuation we remain cautious on the name here with the possibility of one or more notch downgrades on the horizon depending on the macro backdrop.
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