Fitch Downgrades Braskem to 'A -bra-'; Outlook Negative.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 1, 2003

Fitch Ratings has downgraded Braskem S.A.'s (Braskem) long-term national ratings to 'A (bra)' from 'A+ (bra)', as well as its tenth local debenture issue. The rating actions are based on the revision of Fitch's expectations of the pace of improvement in Braskem's credit profile in the near to intermediate term, despite considerable efforts already accomplished by the company's management. Even though Braskem's achievements since its creation are significant, including improved credit protection indicators, realization of ongoing integration synergies and successful refinancing efforts in 4Q 2002, Fitch considers Braskem's financial evolution to be below the parameters assumed for the 'A+(bra)' rating category. Additionally, Fitch assigned a negative outlook to Braskem's ratings, reflecting refinancing risks in view of current volatility in financial markets.

The rating actions incorporate concerns regarding accentuated sector volatility (resulting in higher naphtha costs, Braskem's principal cost variable), as well as the impact of the devaluation of the Brazilian currency to Braskem's indebtedness, largely denominated in or indexed to the U.S. dollar. These factors may adversely affect Braskem's performance, precluding the full achievement of anticipated gains in EBITDA levels and debt reduction targets. Braskem's policy is to hedge at least 75% of a rolling 12-month foreign currency debt service, excluding trade-related obligations.

Notwithstanding the successful refinancing of BRL1.4 billion during the 4Q 2002 and the firm establishment of the company as an operating entity instead of a conceptual project, Braskem's financial flexibility remains pressured by BRL2.6 billion in short-term maturities, of which 47% are trade finance related. This challenging amortization schedule, coupled with a debt structure denominated approximately 69% in U.S. dollar, underscores the company's exposure to refinancing and devaluation risk. Even though Braskem's senior management has been proactive in designing alternative refinancing strategies and options, specific transactions have not yet been finalized this year. In their absence, Braskem remains vulnerable to volatile market conditions, accentuating concerns over pressured liquidity, significant refinancing needs. Once proposed transactions have closed, Fitch will review the company's assigned outlook.

On March 31, 2003, Braskem continued its operational integration through incorporation of OPP Quimica S.A. (OPP), Nitrocarbono S.A. and Economico S.A. Empreendimentos (ESAE). This integration affords Braskem an important opportunity to obtain significant operational synergies, estimated at BRL330 million annually (BRL75 million of which have already been realized), as well as decreasing the company's tax burden. Braskem also benefits from a substantial tax credit from its subsidiary, OPP. ESAE, OPP and Nitrocarbono have ceased to exist and have been fully incorporated into Braskem. Fitch considers this restructuring as positive and as part of the guidelines already incorporated in Braskem's current ratings, which involve a series of structural changes to achieve greater operational and tax efficiencies as outlined in the Braskem consolidation project, initiated in August 2002. It is important to note that the downgrade of Braskem's national scale ratings to 'A(bra)' from 'A+(bra)' is not a consequence of the aforementioned incorporation. The full achievement of the anticipated synergies was considered in the ratings assigned at the moment of Braskem's establishment in August 2002.

Despite a programmed maintenance stop in 2002 which reduced ethylene production by 8%, a 40% price increase in thermoplastic resin prices throughout the year -- in line with international benchmarks -- supported Braskem's pro forma 24% net revenue growth from BRL5.63 billion in 2001 to 6.99 billion in 2002. Moreover, a 29% increase in operating costs, primarily U.S. dollar component raw material costs and greater depreciation, offset revenue gains. On a pro forma basis (which does not consider proportional consolidation of Politeno S.A. and Copesul), Braskem reported EBITDA of BRL2.1 billion, 82% higher than in December 2001, which benefited by the aforementioned recovery in thermoplastic prices and a non-recurring net tax credit of BRL943 million from its subsidiary OPP. Braskem ended 2002 with a total debt/EBITDA ratio of 3.6 times (x) and an EBITDA/interest expense of 4.1x. According to Fitch's analysis, adjusting for non-recurring tax items recognized in 2002 would result in total debt / adjusted EBITDA of 5.6x while adjusted EBITDA / interest expense would be 2.6x. Adjusted EBITDA margin would reach 19% in 2002.

At year-end 2002, Braskem's total consolidated pro forma debt was BRL7.5 billion, of which 45% represented working capital financings (export financings and other working capital loans), 23% Eurobonds maturing between 2004 and 2007, 17% local market debentures (including BRL643 million in subordinate debentures held by the Banco Nacional de Desenvolvimento Economico e Social -- BNDES) and 15% in other financings. Short term obligations include trade related financing, approximately BRL1.15 billion in export contracts which should be liquidated with future exports and BRL700 million in working capital facilities. During the 4Q 2002, Braskem reduced its short-term principal debt by BRL780 million to BRL2.6 billion from BRL3.4 billion as of September 2002. An increase in the company's operating cash generation, extending of debt maturities and a favorable foreign exchange appreciation in the last quarter of 2002 contributed to such of short-term debt. While Fitch believes that a portion of short-term maturities in 2003 will be paid down, the company will depend upon local and international capital market conditions to meet the balance.

In addressing refinancing concerns, Braskem's prudent strategy to extend average maturities of its indebtedness includes the monetization of its export revenue flow generation capacity (totaling an estimated US$400 million in 2002) and long-term contracts with domestic customers. Although the company is leveraged for the current rating category, Fitch expects that cash flow improvements from an anticipated recovery in domestic and international aggregate demand, coupled with ongoing operational synergies, realization of fiscal tax credits from OPP, attractive domestic thermoplastic fundamentals and improving maturity schedule post-2003, will be dedicated to substantially reduce the company's high debt levels.

Fitch views efforts to improve the company's liquidity and financial flexibility as moderately achievable under the premise of further improvement in the global petrochemical cycle, coupled with strengthening domestic aggregate demand and attractive local market thermoplastic demand fundamentals, thus, strengthening Braskem's credit profile within the current rating category. However, further deterioration in the aforementioned external factors may adversely affect the anticipated strengthening of Braskem's credit fundamentals, resulting in further rating revisions. Braskem's ability to continue to adequately address credit concerns of refinancing risk and liquidity will be a key driver in rating assessments and resolution of the negative outlook status.

Braskem is the result of a corporate reorganization involving the petrochemical interests held by the Brazilian Odebrecht and Mariani Groups in August 2002. The principal objective of the merger was the monetization of significant operational and commercial synergies, projected at US$853 million over 10 years (42% of which are tax-related). On Feb. 13, 2002, Braskem was listed in Bovespa as a Level I company. With total production of 4.3 million tons of primary petrochemical products, Braskem enjoys its leadership in Brazil's and Latin America's thermoplastic market, with market share of 51% in the PVC, 36% in the polypropylene and 30% in polyethylene segments. The company is controlled by the Odebrecht e Mariani groups, in direct and indirect participation through Norquisa. Minority shareholders include Petroquisa, of Petrobras, Petros and Previ. Shares of the company are also traded in Sao Paulo and on the New York Stock Exchange.