Investing.com -- Moody’s Ratings has lowered the Corporate Family Rating (CFR) of Braskem (NYSE: BAK ) S.A. and the rating on Braskem America Finance Company’s Backed Senior Unsecured Global Bonds from Ba2 to Ba3. The outlook for both companies has been revised to stable from negative.

The downgrade comes in light of ongoing weaknesses in Braskem’s credit metrics and cash generation, largely due to a downcycle in the petrochemical industry and continued underperformance in Mexico. As of the end of 2024, Braskem’s adjusted leverage, including Mexico, peaked at 15.3x (11.9x excluding non-recurring effects). The company’s free cash flow was negative at BRL5.6 billion, reflecting the weak level of operations and the disbursements related to provisions in Alagoas.

Moody’s expects Braskem’s adjusted leverage to decrease to around 6.5-7.5x in the next 12-18 months as the company’s EBITDA improves along with petrochemical spreads. Braskem’s cost-saving initiatives are expected to lead to neutral free cash flow generation, even with the remaining disbursements related to Alagoas. Nevertheless, this leverage level is still high for the rating category and risks persist in the current macro environment. A further slowdown in global economic growth could extend the industry’s downcycle and limit Braskem’s potential recovery.

Since December 2023, an incident in Alagoas has resulted in an additional provision of BRL1.3 billion for the closure of salt mines. Total provisions related to this incident amount to BRL17.7 billion, with BRL12.7 billion disbursed until December 2024. These provisions reduce the company’s financial buffer to withstand the industry downcycle.

Despite Braskem’s substantial cash position, the company needs to improve operations and reduce cash outflows to achieve free cash flow neutrality during the downcycle. As of December 2024, Braskem had total cash of BRL16.7 billion, a $1 billion (BRL6.2 billion) committed credit facility, and only BRL5.2 billion in debt due until the end of 2026, including Mexico’s debt.

The company’s Ba3 rating is supported by its status as the largest petrochemical company in Brazil and the Americas in terms of resin production capacity. The rating also reflects the company’s dominant market position in Brazil and its geographic diversification, with operations in the US, Mexico, and Europe.

However, the rating is constrained by a sharp deterioration in credit metrics since late 2022, weak global industry conditions, and the company’s high exposure to the volatility of petrochemical spreads. Additional credit concerns include potential additional liabilities related to Alagoas, continued subdued operations in Mexico, and the intention of Braskem’s shareholders to divest the business.

The stable outlook reflects Moody’s expectations that Braskem’s credit metrics will remain weak in the next 12-18 months, but the company will continue to manage liquidity prudently to preserve its credit profile through the downcycle. The rating could be downgraded if Braskem’s liquidity profile deteriorates due to additional material liabilities, weaker than anticipated sales volumes, or more aggressive financial policies. The rating could be upgraded if the company resolves the current issues related to the geological event in Alagoas while improving its liquidity, financial flexibility, and credit metrics.

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