Fitch Rates Braskem Proposed USD275MM Sr. Notes Issuance 'BB+'; Outlook Stable.

RIO DE JANEIRO -- Fitch has assigned a rating of 'BB+' to Braskem S.A.'s (NYSE:BAK) (Braskem) proposed issuance of USD275 million senior unsecured notes due to 2017. The notes are being offered under Rule 144A Regulation S. The proceeds of the offering are expected to be used to prepay existing debts and extend debt maturities. Fitch also maintains foreign currency and local currency Issuer Default Ratings (IDRs) of 'BB+' and a national scale rating of 'AA(bra)' for Braskem. The Rating Outlook is Stable.

Braskem's ratings are supported by the company's moderate leverage, strong liquidity and debt composition, and solid but highly volatility operating cash flow. Braskem also benefits from its leadership position in the petrochemical industry in Latin America and Brazil. The integration of its first and second generation activities provides the company with a competitive advantage within the Brazilian petrochemical industry and has allowed Braskem to achieve substantial synergies and lower costs. In addition, growing sales volumes and a strong pricing environment has enabled the company to lower debt leverage and increase liquidity over the last several years.

Braskem is exposed to volatile naphtha prices, which are linked to the price of a barrel of oil, and represent one of the company's largest cost components. Fluctuations in the price of oil and naphtha may directly impact Braskem's profitability and sales volumes given the difficulties of passing on price increases along the petrochemical chain in the international markets. In the first half of 2006, Braskem's financial performance was negatively affected as a result of increasing feedstock (naphtha) costs that have significantly weakened credit protection measures to the weaker end of the category. During the first half of 2006, Braskem reported a 50% reduction in EBITDA and resulted in leverage measured by Gross Debt/EBITDA of 4.0 times (x) versus 2.4x in 2005 and 2.2 x in 2004, while Net Debt/EBITDA was 3.0x at June 30, 2006 compared to 1.4x in 2005 and 1.5x in 2004.

Over the last several years, Braskem's credit protection measures had shown significant improvement, which should enable Braskem to operate satisfactorily during this challenging period. In additionally, Fitch expects that Braskem will maintain adequate liquidity which should limit its exposure to refinancing risk, and that in 2007 the company should improve leverage to levels more consistent with historical levels. Financial performance is expected to remain under pressure under the remainder of the year.

The Brazilian petrochemical industry began experiencing pressure in the fourth quarter of 2005 due to increasing naphtha prices; a larger additional supply of polyethylene from the entrance of a new player in the domestic market; limited ability to pass on prices within the chain, which pressures margins; and appreciation of the local currency, which negatively influenced the sector's revenues and exports. The average price of naphtha increased 31% in H106 (USD570.00 per ton) compared with the same period in 2005 (USD436.00 per ton). In addition, the entrance into the market of a new producer with a high polyethylene capacity contributed to make the passing on of greater price increases more difficult.

As of June 30, 2006, Braskem had BRL5.9 billion (USD2.7 billion) in total debt and BRL1.3 billion (USD621 million) in cash and financial investments. During the first half of 2006, the company generated an EBITDA of BRL670 million, including BRL112 million of non-recurring income, a sharp reduction compared with the BRL1.3 billion EBITDA registered in the first half of 2005. The company's free cash flow in this period was also significantly affected due to its weak performance and registered a negative value of BRL1billion. Cash flow was affected by smaller business margins, by an increase in the need for working capital (BRL444 million) due to increased exports, by the acquisition of shares in Politeno (BRL238 million); by the greater acquisition of naphtha in the local market; and by the disbursement of dividends (BRL363 million). Free cash flow is expected to improve in second half of 2006 due to a decline in exports, a reduction in the volume of investments in 2006 from BRL900 million to BRL750 million.

Over the next quarters, Braskem's credit profile will come under pressure due to the increase in its leveraging and the challenging scenario that the petrochemical industry should face in 2006 and 2007. Braskem is concluding studies to realize investments in a new petrochemical complex in Venezuela. The project, in partnership with Pequiven, could involve new risks for Braskem, depending on the volume of resources required by the project.

Braskem is the largest petrochemical company in Latin America, producing 6.0 million tons of primary, secondary and intermediary petrochemical products, with an integrated production of first and second generation petrochemicals. The company has grown in the past four years due to the integration of six Brazilian petrochemical companies: Copene Petroquimica do Nordeste S.A., OPP Quimica S.A., Polialden Petroquimica S.A., Trikem S.A., Proppet S.A. and Nitrocarbono S.A. At present the company is organized into four business units: basic inputs, polyolefins, vinyls and business development. Braskem is controlled by the Odebrecht Group and Norquisa, which have 47.5% and 25.4%, respectively, of its voting capital.

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