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Rating Action:

MOODY'S ASSIGNS B1 RATING TO OWENS-ILLINOIS' NEW SENIOR SECURED BANK FACILITIES; DOWNGRADES SENIOR NOTES TO B3; OUTLOOK NEGATIVE

25 May 2001
MOODY'S ASSIGNS B1 RATING TO OWENS-ILLINOIS' NEW SENIOR SECURED BANK FACILITIES; DOWNGRADES SENIOR NOTES TO B3; OUTLOOK NEGATIVE

Approximately $6 Billion of Debt Securities Affected.

New York, May 25, 2001 -- Moody's Investors Service downgraded the senior implied rating of Owens-Illinois, Inc. ("Owens-Illinois") to B2 from B1 and its senior unsecured rating to B3 from B1, and assigned a B1 rating to the $4.5 billion new bank facilities arranged for its subsidiaries. The rating actions are based on the likelihood that free cash flow available for debt repayment will remain thin over the medium term, the uncertainty created by asbestos litigation, and the structural subordination of currently unsecured debt given the terms granted to the new senior secured bank facilities. The rating outlook is negative. Future deterioration of free cash flow that could come from increased asbestos payments could place pressure on the ratings.

Ratings assigned:

Owens-Brockway Glass Container Inc. and other subsidiaries

B1 to new $1.5 billion term loan maturing March 31, 2004

B1 to new $3 billion revolving credit facility maturing March 31, 2004

Ratings downgraded:

Owens-Illinois, Inc.

senior implied, to B2 from B1

senior unsecured debt, to B3 from B1

senior debt shelf registration, to (P)B3 from (P)B1

subordinated debt shelf registration, to (P)Caa2 from (P)B3

From its level of $5,916 million at the end of 1998 -- following the acquisition of BTR assets by Owens-Illinois-- , debt has been only marginally reduced to $5.64 billion at the end of the first quarter of 2001. In 2000, free cash flow before asbestos payments, acquisitions and share repurchases was approximately $250 million. Moody's expects that -- relative to this debt level -- free cash flow will continue to be constrained over the medium term.

Since the acquisition, Owens-Illinois' operations have underperformed -- with operating income declining from $942 million in 1998 to $893 million in 2000 -- for two main reasons. In emerging markets and specifically in Latin America, demand for new glass containers has proven sensitive to the economic environment, because recession has led to increased reliance on returnable, refillable glass containers. Rising raw materials and energy costs have led to margin deterioration. While the company has the ability to pass on such cost increases in most of its customer supply agreements, it can only do so at renewal of these agreements. The negative effect of this underperformance on free cash flow available for debt repayment has been compounded by the strategic choice made by the company to continue its investment effort in cost reduction and to buy back shares for a net amount of $226 million in 1999.

Moody's also views asbestos payments as a continuing threat to Owens- Illinois' free cash flow. Since the late seventies, the company has been settling claims alleging harm from asbestos exposure in the US. These filings are related to a company which Owens-Illinois owned from 1948 to 1958. After a decline in 1997 and 1998, payments have increased up to $180 million in 2000, driven in part by the company's strategy to offer accelerated claims processing in exchange for favorable settlements. Because of the time lag since latest potential exposure and the increasing average age of plaintiffs, claims should ultimately disappear over the long term. Also, Owens-Illinois should be successful in obtaining partial recovery of its expenses from insurance and has had a favorable litigation track record when not settling claims. However, recent changes in the dynamics of asbestos litigation in the US could lead to an increase over the medium term. Asbestos litigation is a very lucrative practice for many law firms. Also, the pool of potential plaintiffs is extremely difficult to quantify. Recent bankruptcy filings by large companies and the resulting stay on asbestos claims against them are causing attorneys to more aggressively seek plaintiffs that might have a valid claim against companies such as Owens-Illinois that have the ability to settle claims more rapidly. An increase in settlement payments over the medium term could severely diminish an already thin free cash flow.

However, some of the company's operating fundamentals remain strong. Owens-Illinois is the largest producer of glass containers in the world and one of the largest in plastics packaging. Over the years, in a sector where product differentiation is difficult to achieve, it has built up strong market positions and high margins by focusing on cost reduction initiatives and developing a manufacturing technological edge. Cost reduction efforts have allowed the company to achieve one of the highest margins among large packaging companies. Technological edge has allowed it to develop a stream of revenue through licensing agreements worldwide. In glass, the company has also benefited from strong positions with beer producers and the increase in the use of glass as a packaging material for this beverage. The 1998 acquisition of BTR assets enhanced already solid market shares and brought Owens-Illinois very strong market presence in the Asia-Pacific market.

Borrowers under the new bank facilities are several domestic and overseas subsidiaries of Owens-Illinois, Inc. The collateral granted to lenders includes substantially all operating assets of the company's domestic subsidiaries and certain foreign subsidiaries. All bank borrowings are cross-guaranteed. In Moody's view, given the strong operating fundmantals noted above, coverage of bank facilities by collateral is substantial and warrants a notching up of one of the bank facility ratings over the senior implied rating.

The obligor for existing notes is Owens-Illinois, Inc. Bondholders have been offered a second lien on the intercompany debt and stock owned by two principal domestic subsidiaries. In addition, these two domestic subsidiaries have offered to guarantee the notes on a subordinated basis. In Moody's view, the value of this collateral does not provide for substantial coverage and does not eliminate the structural subordination of existing notes, leading to a notching down of one from the senior implied rating. However, it provides bondholders with structural seniority over unsecured creditors such as asbestos claimants.

Owens-Illinois is the largest manufacturer of glass containers in North America, South America, Australia, New Zealand, and one of the largest in Europe. OI is also a worldwide manufacturer of plastics packaging.

New York
Angela Jameson
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Christophe Razaire
VP - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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