Rating rationale

Scope Ratings today assigns Linde AG an A+ Corporate Issuer Credit Rating and a S-1+ short-term rating, all with a Stable Outlook. These reflect Scope’s view of i) the group’s very credit-supportive business risk profile, owing to the industrial gases industry’s limited cyclicality and high degree of protection, ii) Linde’s strong market position as one of the four leading global suppliers of industrial gases, and iii) Scope’s view of the group management’s extremely conservative financial policy and high commitment to the ratings assigned.

Scope’s ratings are strongly underpinned by the very stable and resilient industrial gases industry, evidenced by its limited historical cyclicality. In 2009, the global gases industry declined by only a single-digit rate, significantly less than more cyclical sectors such as automotive. In Scope’s view, this is because industrial gases are firmly embedded inputs in many industrial production processes and involve long-term contracts with take-or-pay conditions, a stabilising element in recessions. Customers in general tend to be loyal and more interested in not interrupting a working supplier relationship, namely, maintaining a service at all times. This is usually not compromised for a marginally lower price at a competitor. In addition, Scope considers that there are significant entry barriers to potential newcomers in the form of know-how, capital resources and ‘regional ownership’. It thus makes little sense for a potential new entrant to build a new plant next to a competitor’s existing facility.

Scope believes Linde’s competitive position supports the ratings even more strongly, relative to benefits gained from its industry. This is explained by Linde’s dominant market positions in many countries and regions as well as across product groups. Linde is one of the four global ‘gas majors’, with significant market shares not only in Europe but also ‘away from home’, thereby differentiating it in particular from the two global US-based peers. The last two points bear a direct link to the diversification-related rating driver, which Scope assesses as very strong in the context of Linde’s ratings. Furthermore, Scope believes the company’s competitive position also benefits from stable and comparatively high EBITDA margins between 25% and 30% in the gases division, enabling consistent and strong free cash flow. Given the above factors, Scope believes Linde’s business risk profile to be extremely defensive and supportive for the ratings.

The financial risk profile of Linde reflects Scope’s perception of the management’s very conservative financial and liquidity policies. In addition, key credit metrics have been improving since 2012 – the year of Lincare Holding’s acquisition – and Scope expects further upside in the next two years based on the group’s capacity to generate stable and sizeable annual free cash flows of above EUR 300m after dividends and interest. This enables further deleveraging on a reported basis, as in 2015, which should not be endangered even in times of potential lower growth, which is possible in 2016.

Key rating drivers

Positive

• Credit-supportive industry risk of industrial gases, given its limited cyclicality – even in times of extreme crisis – and high barriers to entry, coupled with a low substitution risk
• Very strong competitive position, reflecting Linde’s high and stable operating margins, very high degree of diversification and global position as one of only four industrial gases producers with a significant international market share
• High recurring profits enable consistent and high free cash generation
• Conservative financial policy
• Extremely conservative liquidity policy

Negative

• Comparatively lower growth realisation compared to some peers
• Engineering division is suffering from low business volumes in the petrochemicals industry due to the low oil price

Outlook

The Stable Outlook reflects Scope’s expectation that Linde’s financial risk profile will continue to improve as it did in 2015. Specifically, Scope views credit metrics aligning with a low A category to be in line with the corporate ratings, as indicated by a FFO-to-Scope-adjusted-debt ratio of about 40% and a Scope-adjusted-debt-to-EBITDAR ratio of about 2x. In general, Scope believes potential future rating changes are triggered by the financial risk profile, as Linde’s business risk profile is rated relatively higher and is deemed very stable. A higher rating could be triggered by a sustainable improvement in the above-mentioned credit metrics. A negative rating action could be the result of a more aggressive financial policy or a sustained negative deviation from ratios commensurate with the present ratings.

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Legal and regulatory disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr Stefan Bund, Dr Sven Janssen.
The rating analysis has been prepared by Olaf Tölke, Lead Analyst
Responsible for approving the rating: Dr Stefan Bund, Committee Chair

Rating history
Date; Rating action; Rating
1 June 2016; Initial; A+/S-1+ Outlook Stable
The rating concerns an issuer, which was evaluated for the first time by Scope Ratings AG.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
- Annual reports/semi-annual reports of the rated entity
- Website of the rated entity
- Detailed information provided on request
- Data provided by external data providers
- Interview with the rated entity
- External market reports
- Press reports/other public information
Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.
 
Methodology
The methodology applicable for this rating (Corporate Rating Methodology) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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Rating issued by
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