Lafarge on CreditWatch negative on high exposure to Middle East


Standard & Poor's Ratings Services has placed its 'BBB-/A-3' long- and short-term corporate credit ratings on France-based building materials group Lafarge S.A. on CreditWatch with negative implications.

"Our CreditWatch placement reflects Lafarge's persistently low credit metrics, the group's inability to restore its financial profile in a timely fashion, and its large exposure to the Middle East and Africa, particularly Egypt [BB/Watch Neg/B]," said Standard & Poor's credit analyst Eric Tanguy.

S&P are highly likely to lower the ratings on Lafarge in the near future, most likely by a single notch.

For several quarters, Lafarge's key credit ratios have not been commensurate with investment-grade ratings, nor have they been consistent with the company's stated financial objective of unadjusted cash flow from operations to net debt of 28%-30%. Year-end 2010 ratios showed no sign of improvement, with no debt reduction achieved over the course of last year.

S&P believe that any improvement in credit metrics will also be hampered by the persistence of sluggish market conditions for global cement producers in early 2011, energy price increases, and Lafarge's exposure to emerging country risk.

The group's results for 2010, like those of its global peers, mirrored the depressed state of the overall cement market until now, in particular in terms of demand: sales decreased by 3% compared with 2009 on a like-for-like basis; and full-year EBITDA margin for 2010 contracted to 22.4%, a slight deterioration against the 22.7% low reported for the same period in 2009. We believe that for at least the first half of 2011, the overall environment for global cement producers will not be supportive of a rebound in Lafarge's profitability.

"We aim to resolve the CreditWatch placement within the coming weeks, once we have assessed the full impact of a possible downgrade on Lafarge's outstanding debt instruments," said Mr. Tanguy.

S&P's assessment will reconsider primarily the financial risk profile of the group in light of our expectations about near-future prospects for the cement industry, emerging country risk, and the impact from recently announced disposals and reduced dividends.

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