Moody's Investors Service assigned a Aa1 issuer rating to BP Amoco plc, the entity created by the merger of The British Petroleum Company plc (BP) and Amoco Corporation. At the same time the agency upgraded from Aa2 to Aa1 the senior unsecured long-term debt ratings of BP and its guaranteed subsidiaries, and confirmed the Aa1 senior unsecured long-term debt ratings of Amoco and its guaranteed subsidiaries. This rating action completes the agency's review for possible upgrade on both ratings which was initiated on 11 August 1998 in response to the announcement that the two companies planned to merge in an all stock transaction with an equity split of 60% BP and 40% Amoco. The merger has been approved by both sets of shareholders and by the European Union and US Federal Trade Commission regulatory authorities.
The upgrade of BP's long-term rating to the level of Amoco Corporation reflects the new entity's status as one of the world's largest and most geographically diversified integrated petroleum companies with a number of enhanced market positions. Operationally, the merger has significant benefits for both parties. BP Amoco plc will have pro forma combined revenues of US$108 billion, comprising about 2.8 million BOE's per day of production, enhanced upstream growth prospects, major refining and marketing systems in the U.S. and Europe, and one of the world's largest chemical companies. It will enjoy a stronger and more stable operational profile as a result of the merger, with highly complementary assets contributed by both companies in exploration and production, refining, distribution, marketing, and chemicals.
Financially, Moody's expects that BP Amoco will be in a strengthened position to generate sizeable and relatively stable cash flows. The enlarged entity will have possibilities for considerable cost savings (assessed by BP to be at least $2 billion a year) and opportunities to take on more remunerative projects. Nevertheless, due to its financial policies, the new group will likely remain slightly yet clearly inferior in terms of debt protection compared with the other two Aaa rated "super-majors," Exxon Corporation and The Royal Dutch/Shell Group. Moody's would not expect BP Amoco's debt to fall far below its current pro forma 24% leverage position. BP Amoco has stated its intention to limit leverage to 30% and to set a "through the cycle" ceiling of 50% dividend payouts. While these ratios establish the group as a solid Aa-company, the relative level of indebtedness at which Moody's expects BP Amoco to operate is materially higher than the level habitually maintained by the Aaa-rated integrated petroleum groups. Comparatively higher debt will result in BP Amoco's interest coverage and cash flow to debt measurements likely remaining weaker than its Aaa peers. In addition, BP Amoco's policies concerning share repurchases to reward shareholders could affect the company's financial leverage over time. Consequently, Moody's has assigned a Aa1 long-term rating to the new group's debt, with a stable outlook. That said, against the background of BP Amoco's operational strength, a medium term strengthening of the new group's financial policies and the achievement of improvements in its returns and cash flow could result in the group attaining a Aaa rating.
Ratings reviewed include British Petroleum plc's guaranteed subsidiaries, upgraded to Aa1, and the jointly and severally guaranteed long-term debt of Amoco Corporation and Amoco Company, confirmed at Aa1. Also upgraded are the guaranteed senior secured notes of Windsor Petroleum Transport Corporation, raised from Aa2 to Aa1. The Prime-1 commercial paper ratings for both companies or their guaranteed subsidiaries, including Amoco Corporation, Amoco Company and Amoco Canada Petroleum Co. Ltd.; and BP America, Inc., BP Capital BV, BP Capital plc, and BP Finance Australia Ltd, were confirmed at the time the merger was announced. Despite Amoco becoming a subsidiary of BP under the merger agreement, Moody's notes that it is intended that both parties' debt (and guaranteed debt) should remain pari passu by being guaranteed by BP Amoco.
The British Petroleum Company plc is headquartered in London, as will be BP Amoco plc. Amoco Corporation is headquartered in Chicago, Illinois.
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