London – Credit rating agency Moodys is backing this week’s move by German polymers and chemicals producer Lanxess to strike a rubber partnership with Saudi national oil company Saudi Aramco.
The joint venture is credit-positive for Lanxess, said Moodys vice president and senior credit officer Francois Lauras. The move, he believes, will allow the company to cut debt while building up liquidity reserves to fund future investments and withstand potential cyclical pressure.
According to Moodys, Lanxess will reduce its exposure to the synthetic rubber business, which it said, remains challenged amid significant oversupply after recent capacity additions in Asia.
Longer term, the alliance with Saudi Aramco should help strengthen the competitive position of the business, the rating firm’s report added.
“As contracts with current suppliers run out over the next few years, the joint venture will gradually be able to source feedstock from Saudi Aramco on favourable terms,” said Moodys anticipating a strong long-term benefit.
“This access to key raw materials will improve the cost position of the joint venture and the predictability of its cash flow, which has historically been affected by the volatility of feedstock costs, such as butadiene,” it added.
Lanxess and Saudi Aramco announced the deal to form a 50/50 synthetic rubber joint venture on 22 Sept. The two companies expect to complete the transaction, which is subject to regulatory approvals, in the first half of 2016.
Saudi Aramco is to pay about €1.2 billion in cash for its 50-percent share in the JV, after deducting debt and other financial liabilities. The total joint venture is valued at €2.75 billion.