Befesa outlook revised to positive by S&P on reduced leverage

Investing.com -- S&P Global Ratings revised its outlook on Befesa S.A. to positive from stable while affirming its ’BB’ credit rating, citing expectations for reduced leverage.

The ratings agency projects Befesa’s adjusted EBITDA will grow to €225 million in 2025, up from €193 million in 2024 and €164 million in 2023, which had led to a downgrade in May 2024.

Key drivers for the EBITDA recovery include healthy zinc prices, with zinc hedged at an average price of €2,640 per ton for about 65% of volumes, contribution from the ramp-up of two new Palmerton kilns, and cost savings at the Rutherford zinc refining plant.

However, EBITDA growth is being partially offset by declining secondary aluminum alloy performance due to intense competition for scrap with Southeast Asian players and weak demand from European auto manufacturers. Poor results from Chinese operations are also a factor as the transition to electric arc furnace technology is taking longer than expected.

S&P anticipates Befesa’s adjusted leverage will decrease to 2.9x by year-end 2025 and further to 2.6x by year-end 2026. The company is expected to generate positive discretionary cash flow of €49 million in 2025 and €46 million in 2026, even after dividend payments of €26 million and €38 million in those years, respectively.

Growth for Befesa is expected to be primarily driven by operations in the U.S. and Europe, where steel producers continue to convert traditional furnaces to electric arc furnaces, supporting demand for Befesa’s steel dust recycling services. The company plans to focus on ramping up its Palmerton and Bernburg projects while being prudent with future growth capital expenditures.

S&P noted that Befesa aims to operate with company-reported leverage between 2.0x and 2.5x, which would be consistent with a ’BB+’ rating. However, the agency expressed some uncertainty about the company’s commitment to adjusting dividends or capital expenditures during future downturns.

A rating upgrade would require Befesa to achieve sustainable EBITDA of more than €225 million over the cycle, demonstrate a track record of adjusting capital expenditures and dividends to support neutral discretionary cash flow, and maintain adjusted debt to EBITDA of up to 3x at the bottom of the cycle.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.