Air Products outlook revised to negative by Moody’s Ratings

Investing.com -- The outlook for Air Products and Chemicals (NYSE:APD), Inc. (Air Products) has been revised to negative from stable by Moody’s Ratings on May 27, 2025. The decision comes amid growing concerns about the firm’s ability to maintain credit metrics that would continue to support its current rating, given its negative free cash flow in 2025 and limited free cash flow generation in the coming years.

The rating agency has also adjusted Air Products’ ESG Credit Impact Score (CIS) from CIS-1 to CIS-2, reflecting execution risks related to the company’s plan to reduce debt and improve credit metrics over the next 12-18 months. The Governance Issuer Profile Score (IPS) was likewise changed from G-1 to G-2 due to the same concerns.

John Rogers, Senior Vice President at Moody’s Ratings and lead analyst on Air Products and Chemicals, Inc., stated that while the company is reducing capital spending to focus on its core business and aims to reach free cash flow breakeven after 2025, several issues raise doubts about its ability to maintain credit metrics at levels that will fully support the ratings in the next few years.

Air Products’ A2 and Prime-1 ratings are backed by the company’s size, strong profitability, solid liquidity, and relatively stable cash flow generation through economic cycles compared to most rated chemical and industrial firms. The company also benefits from a strong business model and a higher proportion of on-site business compared to rated peers, such as Air Liquide (OTC:AIQUY) S.A. and Linde (NYSE:LIN) plc, with a significant portion of take-or-pay contracts that should reduce earnings volatility. Moreover, management remains publicly committed to the A2 rating.

The company’s change in CEO in February 2025 has led to a reduced business risk related to capital projects that lack committed off-takers, as well as a concentrated effort to achieve free cash flow breakeven, after dividends, post-2025. However, an increase in expected debt in 2025, coupled with some uncertainty over the company’s earnings trajectory, partly driven by macroeconomic factors, could keep credit metrics weaker than would be appropriate for the rating for an extended period.

Air Products’ credit metrics are currently strained with Net Debt/EBITDA of 3.0x and Retained Cash Flow/Net Debt (RCF/Net Debt) of 12%. Excluding the debt of its NGHC joint venture debt (NEOM project; APD owns 33%), Net Debt/EBITDA is just 2.2x, but RCF/Net Debt is weak at just 16%. The company’s credit metrics need to be at the more conservative end of the expected range to compensate for risks related to NEOM and the Louisiana Clean Energy project.

Air Products has solid liquidity, which supports its Prime-1 rating. It has a significant cash and marketable securities balance (over $1.6 billion as of March 31, 2025) and access to an undrawn $3.0 billion revolving credit facility due in March 2029 and an undrawn $0.5 billion 364-day revolving credit facility due March 2026.

The negative outlook reflects weak credit metrics that may get weaker due to negative free cash flow in 2025. In addition, the timing of assets sales that could reduce debt and strengthen credit metrics to levels that would be more supportive of the current rating is uncertain.

The ratings could be downgraded with expectations for adjusted financial leverage sustained above 2.5x (Debt/EBITDA) or retained cash flow-to-debt sustained below 25% (RCF/Debt). There could be an upgrade in the ratings if adjusted financial leverage is sustained below 2.0x (Debt/EBITDA), retained cash flow-to-debt is sustained above 35% (RCF/Debt), and there is a public commitment to a higher rating. However, an upgrade is highly unlikely given the expectation for credit metrics over the next several years.

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