S&P downgrades Ashland to BB due to weakening indicators

Investing.com - S&P Global Ratings downgraded Ashland Inc. from BB+ to BB on Monday, citing a reassessment of business risks and weakening credit metrics. Outlook remains stable.

Ashland’s business size has significantly shrunk over the past decade as the company intentionally downsized, focusing on higher-value chemicals and more specialized businesses. The company divested several operations, including the spin-off of Valvoline Inc. in 2017, the sale of its Performance Adhesives business in 2021, and the phased sale of assets from its previous acquisition of Pharmachem Laboratories through the sale of Avoca in 2025.

The company’s consolidated revenue declined from $5 billion in 2016 to $1.8 billion in fiscal 2025, while adjusted EBITDA fell from $855 million to $407 million. The downgrade in business risk reflects the reduction in Ashland’s scale and manufacturing footprint, as well as its more niche positioning within the broader chemicals sector compared to more diversified peers.

Ashland’s operational performance in fiscal 2025 was below expectations. Organic sales were mixed overall, with the Life Sciences and Personal Care segments remaining relatively stable. The Specialty Additives segment underperformed due to weak global demand, including softness in the construction markets in China and North America.

S&P expects earnings in fiscal 2026 to be impacted by operational disruptions and weather-related shutdowns in the first half of the year, leading to additional costs and reduced absorption capacity. The agency anticipates that the Specialty Additives and Intermediates businesses will continue to drag on performance, and any recovery in the coatings business will be hindered until construction markets, especially in China, improve.

Ashland’s operating cash flow to debt ratio decreased from 25% last year to 21% in 2025, and S&P expects this ratio to be around 20% this year due to ongoing profit pressures. The company is expected to continue prioritizing most of its free operating cash flow for shareholder returns, including dividends and share repurchases.

S&P projects EBITDA margins will remain above 20%, gradually increasing to 25% by 2028 supported by ongoing cost-saving initiatives and expansion of high-margin businesses.

The stable outlook reflects expectations that credit metrics will remain appropriate for the current rating over the next 12 months. S&P expects the weighted average FFO to debt ratio to be around 20%.

If the weighted average FFO to debt ratio weakens further into the 12%–20% range, S&P may take a negative rating action. This could occur if: demand in the Specialty Additives segment weakens further, leading to profit declines; the Life Sciences or Personal Care segments underperform; the company fails to achieve targeted cost savings; or free cash flow after dividends and share repurchases remains negative.

Conversely, if the fundamentals of end markets improve significantly, with stronger-than-expected growth in Life Sciences and Personal Care, increased market share, or EBITDA margins improve beyond expectations, pushing the weighted average FFO to debt ratio into the higher end of the 20%–30% range, a positive rating action could be considered.

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