MOODY'S AFFIRMS Baa1/P-2 RATINGS OF AMCOR AND ITS GUARANTEED SUBSIDIARIES; ASSIGNS Baa2 RATING TO THE PROPOSED CONVERTIBLE NOTE; OUTLOOK NEGATIVE
Sydney, April 06, 2001 -- Moody's Investors Service today affirmed the Baa1 senior unsecured and P-2 short-term ratings of Amcor Ltd's (Amcor) guaranteed subsidiaries. Moody's also affirmed Amcor's Baa2 senior subordinated debt and P-2 short-term ratings. This rating action follows the announcement by Amcor of a debt financed investment to take 67% stake in a newly formed joint venture with Danisco Flexible packaging business and selected flexible packaging operations of Ahlstrom Corp (Akerlund & Rausing), forming the largest flexible packaging company in Europe. The affirmation reflects Moody's expectation that the investment will proceed as planned, bringing Amcor the benefits of business and geographic diversification. The affirmation also acknowledges Amcor's leading position in the Australasian packaging industry, which continues to generate stable operating cash flow to fund its overseas expansion. At the same time, Moody's has assigned Baa2 rating to the proposed A$300M perpetual non-cumulative convertible note, reflecting the note's subordinated status to Amcor's senior unsecured obligations. Moody's has also revised the rating outlook to negative, in view of the company's increased financial leverage in the near term, and the potential integration risks of the various new investments/acquisitions: notably CNC, the newly acquired PET operation in the US, and the announced European joint venture.
The ratings affirmed are:
Amcor Ltd - US$200M Senior Subordinated Convertible Notes, Baa2
Amcor Ltd - A$250M Commercial Paper Program, P-2
Amcor Ltd and Amcor Finance (USA), Inc. - US$200M Commercial Paper Program, P-2
Sunclipse Inc. - US$125M Senior Notes guaranteed by Amcor Ltd, Baa1
New rating assigned is:
Amcor Investment (New Zealand) Ltd - A$300M Non-cumulative Subordinated Convertible Notes guaranteed by Amcor Ltd, Baa2
Moody's considers that Amcor's management has successfully realigned the company's business profile through the spin-off in early 2000 of the historically more volatile paper division, and by the divestment of certain non-core overseas packaging operations over the last 3 years. The company has also made various strategic investments to enhance its competitive position in several packaging segments, such as PET, flexible and tobacco packaging products. In Moody's opinion, the acquisition of CNC and the European joint venture investment are in line with Amcor's core business growth strategy. In addition, the combined market share and coverage of the three partners enable the joint venture to take a leading role in the rationalisation and consolidation of the European market.
Moody's notes that the joint venture will acquire the businesses from the three shareholders, using a mix of shares and cash, of which the cash consideration will be funded by borrowing from Amcor on an arms' length basis. As a result, the total funds required by Amcor for the establishment of the joint venture are A$572M, which will be financed by the proposed convertible note and available funds.
Moody's recognises that Amcor's management regards the convertible note as equity and therefore as enhancing the balance sheet flexibility. In Moody's opinion, the "no maturity" and "loss absorption" features of the convertible note are potentially impacted by the ability of Amcor to encourage non-conversion at reset. Moody's also regards it as unlikely that Amcor will not pay the note's coupon except in extreme circumstances. The company may actively seek to avoid dilution of its earnings per share at a time of reduced earnings by increasing the coupon rate of the note at reset. This may discourage conversion and thus increase fixed charge-like demands on cash flow. For the aforementioned reasons, Moody's considers the convertible note as more debt like instrument, which is ranked pari passu to the company's existing subordinated convertible note. Moody's comments that the note could develop benefits for Amcor's capital structure in an up-turning share price environment.
The issuance of the convertible note is on top of the recent A$370M debt-financed acquisition of CNC in February 2001. The increase in debt level is partially mitigated by the management's decision to introduce dividend re-investment plan. However, projected debt reduction will be modest given the on-going capital expenditure program and the option to take out the remaining 33% stake in the joint venture after 4 years. Moody's takes comfort in the management's debt policy of maintaining net debt-to-capital not exceeding 50%.
In Moody's opinion, however, the increase in debt will limit the financial flexibility of Amcor in the near term. In addition, it remains a challenge for Amcor's management to successfully integrate the new investments/acquired businesses, and to achieve the projected synergies and operating performances going forward. The rating outlook is therefore negative.
Amcor Limited, headquartered in Melbourne, Australia, is an international packaging product manufacturing company, with operations throughout 22 countries in North America, Europe and Asia.
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