lafargeholcim ltd · lafargeholcim ltd domicile switzerland long term rating baa2 , possible...

CORPORATES

CREDIT OPINION27 January 2017

Update

RATINGS

LafargeHolcim LtdDomicile Switzerland

Long Term Rating Baa2 , PossibleDowngrade

Type LT Issuer Rating - DomCurr

Outlook Rating(s) Under Review

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Stanislas Duquesnoy 49-69-70730-781VP-Sr Credit [email protected]

Florian Zimmermann 49-69-70730-971Associate [email protected]

Anke Rindermann 49-69-70730-788Associate [email protected]

LafargeHolcim LtdCredit Opinion update

Summary Rating RationaleThe Baa2 rating mainly takes into account LafargeHolcim's (LH) (i) position as a worldwideleading producer of cement, aggregates, ready-mix concrete, asphalt and related services,(ii) good geographical diversification, (iii) better resilience to cyclical swings in demandfor cement, aggregates and ready-mix concrete in individual countries given its improvedbusiness profile, (iv) synergies still to be generated in the next years, thereby improvingthe group's profitability, and (v) disposal proceeds that if applied to debt reduction wouldimprove LH's leverage ratio.

Factors constraining the rating relate to (i) current credit metrics that are below the Baarating category exemplified in the high leverage of the merged group with LTM September2016 Debt/EBITDA of 5.0x and RCF/net debt of 15% (as per Moody's calculation), (ii)exposure to the cyclicality of the cement and aggregates industry, and (iii) the announcedincrease in dividend to CHF2 per share in 2017 and of a share buyback programme of CHF1billion over two years on the back of expected improvement in operating performance.

Exhibit 1

LH's Debt/EBITDA ratio remains substantially above our 3.5x expectation for the current ratingDebt/EBITDA development since 2011

In light of our current review process we have refrained from providing a precise leverage forecast for 2017 and 2018Source: Moody's Financial metrics

Recent developmentsMoody's has placed all ratings of LafargeHolcim under review for downgrade on 21stNovember, 2016. The action was prompted by the announcement of measures that areconsidered by Moody's as shareholder friendly at a time when the group's credit metrics wereweak for the current rating category.

Moody's will finalise its review process after the publication of the full year 2016 results ofLafargeHolcim on March 02, 2017 with a more precise evaluation of point-in-time credit

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1057095

MOODY'S INVESTORS SERVICE CORPORATES

metrics based on 2016 audited accounts and of the path of deleveraging over the next 12 to 18 months.

Credit Strengths

» Largest producer of cement and aggregates worldwide

» Business model protected by high barriers to entry

» Strong geographical diversification with material exposure to emerging markets

» Good liquidity profile and access to debt capital markets

Credit Challenges

» Complexity and costs related to the merger of two large international companies such as Lafarge and Holcim, that partly offset thestrong synergy generation potential from the combination

» Contrasted performance across regions with certain emerging markets not delivering anticipated results

» Shareholder friendly measures announced at the end of last year at a time when credit metrics are below our expectation for thecurrent rating

» Low capacity utilisation by historical standards in several markets makes it difficult to raise prices

Rating OutlookAll ratings of LafargeHolcim are currently under review for downgrade. Moody's will finalise its review post publication of the 2016 fullyear results.

Factors that Could Lead to an Upgrade

» Rating upgrade unlikely within the next 12-18 months due to review for downgrade initiated at the end of last year

» RCF/net debt reaching at least 25% on a sustainable basis

» Debt/EBITDA ratio below 3.0x on a sustainable basis

Factors that Could Lead to a Downgrade

» RCF/net debt below 20% on a sustainable basis

» Debt/EBITDA above 3.5x on a sustainable basis

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 27 January 2017 LafargeHolcim Ltd: Credit Opinion update


Key Indicators

Detailed Rating ConsiderationsLEADING MARKET POSITIONS WITH WIDE GEOGRAPHICAL FOOTPRINT

After the successful completion of the merger of Holcim Ltd with Lafarge SA in July 2015, the combined group emerged as one ofthe world's leading building materials suppliers, benefiting from an industry with considerable barriers to entry (high capital intensity,regulatory constraints in accessing quarries, privileged access to raw materials and lead time in bringing brown or greenfield projects toproduction), very limited substitution risk especially for cement and a relatively fragmented customer base which favors suppliers.

The group's rating is also supported by its strong international footprint, with operations spread across 90 countries and a goodmix between exposure to mature and developed economies. The improved business profile should provide for a better resilience tocyclical swings in demand for cement, aggregates and ready-mix concrete in individual countries. Although the merged company willremain exposed to the cyclicality of the cement and aggregates industry, we believe the increase in scale and the further geographicaldiversification will support the company to strengthen its market position versus its closest competitors, namely HeidelbergCement AG(Baa3 stable), as well as Cemex (unrated) and CRH Ltd (Baa2 stable).

IMPROVEMENT IN OPERATING PERFORMANCE YTD SEPTEMBER 2016 BUT CREDIT METRICS REMAIN WEAK FOR THE CURRENTRATING CATEGORY

Despite mixed market trends across LH's key geographies, which led to flat or slightly negative volume developments across allbusiness lines, the group managed to post a 2% increase in LH adjusted operating EBITDA (+14.5% on a reported basis) supportedby CHF457 million in synergies. LH's cash flow generation also improved strongly albeit from a low base with a Cash Flow fromOperations (as computed by Moody's) of CHF1,651 million YTD September 2016 versus CHF1,003 million during the same period in2015.

As a result, credit metrics of LH did improve although not as swiftly as we would have expected at the beginning of 2016. Debt/EBITDAcurrently stands at 5.0x (7.1x at FYE2015) and RCF/Net debt at 15% (12.1% at FYE2015), which is below our requirements for the Baa2rating category. Moody's would expect credit metrics to further improve in Q4 2016 bolstered by easy comparatives from a weak Q42015, by cash proceeds from asset disposals (although LH will loose some material earnings and cash flow contribution in 2017) andfurther costs synergies from the merger.

INCREASED DIVIDEND AND SHARE BUYBACK AT A TIME WHEN CREDIT METRICS ARE WEAK FOR THE RATING CATEGORY

At its investor day at the end of last year, LH has announced a number of measures to bolster the remuneration for shareholdersincluding a dividend increase to CHF2 per share to be paid out in 2017 from CHF1.5 per share paid out in 2016 (more than CHF250million increase in payout ratio compared to 2016). LH has also announced its intention to distribute CHF1 billion to shareholders overtwo years through share buybacks.



These measures come at a time when credit metrics of LH have been below our requirements for the rating category since the closingof the merger. While the share buyback will be spread over two years and should be at least partly funded from the group's free cashflow, the dividend increase is material in comparison to the group's funds from operations, even more so in light of the fact that LH willloose some contribution from disposed assets in 2017.

ASSET DISPOSAL PLAN SHOULD FURTHER SUPPORT DELEVERAGING BUT ABILITY TO MAINTAIN CURRENT RATING LARGELYPREDICATED ON IMPROVEMENTS IN OPERATING PERFORMANCE

As part of its portfolio optimization measures the company expects to achieve EUR5 billion of disposal proceeds by 2017. HoweverLH will also loose approximately CHF500 million of adjusted operating EBITDA from the divestments and the restructuring of itssub-saharan African and Chinese operations (excluding CHF100 million operating adjusted EBITDA from Lafarge India, which wasdiscontinued in 2015), which will reduce the deleveraging impact from the divestments.

The ability of LH to restore credit metrics in line with our requirement for the current rating remains therefore largely predicated onLH's ability to achieve its public guidance of an operating EBITDA of CHF7 billion by year-end 2018. The achievement of this targetimplies volume growth and price increase assumptions, which would be significantly stronger than what most competitors in thebuilding materials sector (including Lafarge and to a lesser extent Holcim) have achieved in recent years. The evaluation of theseunderlying assumptions on a market by market basis is the key focal point of our review process.

Liquidity AnalysisMoody's regards LH's liquidity profile as very good. At 30th September 2016, the group's liquidity position consisted of CHF4.6 billionavailable cash & cash equivalents and CHF6 billion availability under committed credit lines with no financial covenants. We note,however, that a portion of the group's cash balance is not immediately available as it is constrained in fully consolidated but not fullyowned subsidiaries or in countries with limitations on the transfer of foreign currency (e.g. China or Egypt). Even excluding that effect,LH's cash sources together with its funds from operations and the expected cash inflows resulting from the asset disposals should bemore than sufficient to cover cash outflows such as debt repayments, capex, working capital changes and dividends during the next 12months.

Corporate ProfileHeadquartered in Jona, Switzerland, LafargeHolcim was created from the merger of Holcim and Lafarge and is the world leader inthe building materials industry with 256 million tons (mt) cement volumes sold and 292 mt of aggregates volumes on a pro formabasis 2015. Additional activities include ready mix concrete, asphalt and a range of other services. LH generated revenues of CHF29.48billion and reported an company adjusted operating EBITDA of CHF5.75 billion for 2015 on a pro forma basis.



Rating Methodology and Scorecard Factors

Ratings

Exhibit 4Category Moody's RatingLAFARGEHOLCIM LTD

Outlook Rating(s) Under ReviewIssuer Rating -Dom Curr Baa21

Senior Unsecured -Dom Curr Baa21

Other Short Term (P)P-21

HOLCIM US FINANCE S.A R.L. & CIE S.C.S.

Outlook Rating(s) Under ReviewBkd Senior Unsecured Baa21

Bkd Commercial Paper P-21

Bkd Other Short Term -Dom Curr (P)P-21

LAFARGEHOLCIM ALBION FINANCE LTD

Outlook No OutlookBkd Sr Unsec MTN (P)Baa21

Bkd Other Short Term (P)P-21

LAFARGEHOLCIM CONTINENTAL FINANCE LTD



LAFARGEHOLCIM INTERNATIONAL FINANCE LTD





LAFARGEHOLCIM STERLING FINANCE(NETHERLANDS)

Outlook No OutlookBkd Sr Unsec MTN -Dom Curr (P)Baa21


HOLCIM FINANCE (LUXEMBOURG) S.A.

Outlook Rating(s) Under ReviewBkd Senior Unsecured -Dom Curr Baa21


LAFARGE SA

Outlook Rating(s) Under ReviewSr Unsec Bank Credit Facility -Dom Curr Baa21

Senior Unsecured Baa21

Subordinate MTN -Dom Curr (P)Baa3HOLCIM FINANCE (BELGIUM) S.A.

Outlook No OutlookBkd Commercial Paper -Dom Curr P-21

LAFARGEHOLCIM FINANCE US LLC


HOLCIM CAPITAL CORPORATION LTD.


Bkd Commercial Paper P-21

HOLCIM FINANCE (AUSTRALIA) PTY LTD

Outlook Rating(s) Under ReviewBkd Senior Unsecured -Dom Curr Baa21


HOLCIM OVERSEAS FINANCE LTD.


HOLCIM GB FINANCE LTD.


LAFARGE NORTH AMERICA, INC.

Outlook NegativeSenior Unsecured MTN (P)Baa2

[1] Placed under review for possible downgrade on November 21 2016Source: Moody's Investors Service



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REPORT NUMBER 1057095


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Contacts

Stanislas Duquesnoy 49-69-70730-781VP-Sr Credit [email protected]

Florian Zimmermann 49-69-70730-971Associate [email protected]

Anke Rindermann 49-69-70730-788Associate [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


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