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Rating Action:

MOODY'S ASSIGNS B1 TO OWENS-BROCKWAY'S SECURED NOTES AND B2 TO ITS PROPOSED SR NOTES; RATINGS OUTLOOK IS STABLE

23 Apr 2003
MOODY'S ASSIGNS B1 TO OWENS-BROCKWAY'S SECURED NOTES AND B2 TO ITS PROPOSED SR NOTES; RATINGS OUTLOOK IS STABLE

Approximately $7 billion Debt Securities Affected

New York, April 23, 2003 -- Moody's Investors Service assigned new ratings and took other rating actions detailed below on the debt of Owens-Illinois, Inc. ("O-I"), ultimate parent holding company of Owens-Illinois Group, Inc. ("O-I Group"), and subsidiaries. Moody's also took action on the debt ratings of Owens-Brockway Glass Container Inc. ("Owens-Brockway"), O-I Group's principal wholly-owned operating subsidiary. Despite O-I's consistently solid EBIT generation and industry leadership, the ratings are constrained by its sizable debt burden and minimal consolidated free cash flow adjusted to include mandatory asbestos payments. Thin coverage of interest expense, high capital investment, no tangible equity, and soft performance throughout its businesses further constrain the ratings. In Moody's opinion, liquidity pro-forma for the proposed transactions remains adequate and continued access to bank financings is anticipated throughout the intermediate term. The stable ratings outlook reflects tolerance within the pro-forma ratings categories to absorb modest fluctuations in credit statistics. Today's ratings actions were as follows:

B1 confirmed for the existing $2.45 billion secured credit facility

B1 assigned to the proposed $450 million senior secured notes, due 2013

B2 assigned to the proposed $350 million senior unsecured notes to be issued at Owens-Brockway, due 2013

B3 confirmed for the existing senior unsecured notes issued at O-I totaling $1.7 billion, due 2004-2018

Upgraded to B1 from B2 the existing senior secured notes totaling $1.625 billion, due 2009-2012

Upgraded to Caa1 from Caa3 the existing $452.5 million perpetual convertible preferred stock

SGL-3 confirmed Speculative Grade Liquidity Rating (updated rationale is independent of this press release)

B2 confirmed senior implied rating

B3 confirmed senior unsecured issuer rating

The ratings outlook is stable.

The ratings are predicated on the enforceability of the financing structure and collateral packages as proposed, and the ratings are subject to final execution and review of documentation. The proposed transactions consist of Owens-Brockway issuing two bonds: a $450 million senior secured note and a $350 million senior unsecured note. Proceeds are intended to permanently reduce revolver outstandings.

The ratings reflect the significance of sizable cash requirements on O-I's cash flow resulting in its inability to materially reduce its high debt levels. The balance sheet is impaired as evidenced by the absence of tangible equity, and it is further weakened by sizable charges to equity for asbestos reserves. In Moody's opinion, margin pressure is likely because of: high energy costs and the related time lag in passing increases through to customers; competitive pricing pressures from customer consolidations in the Plastics segment; unseasonably cold weather in North America affecting demand for glass beverage bottles; the lingering effects of the national strike in Venezuela; and global economic malaise. However Moody's anticipates that throughout the intermediate term, O-I should be able to sustain margins at levels that continue to lead the packaging sector.

In Moody's opinion, liquidity is adequate as O-I has sufficient operating cash flow to satisfy its working capital requirements, to finance capital expenditures, and to fund asbestos payments. Moody's anticipates that the company should maintain cushion under existing bank financial covenants. Cash balances in excess of $100 million provide additional liquidity support. In the near term, Moody's expects the company to address maturing debt in 2004 consisting of the $300 million 7.85% senior note at O-I and the existing secured credit facility at Owens-Brockway.

The ratings incorporate O-I's leading position throughout its markets worldwide and reflect the resulting price flexibility and established customer relationships with multi-national companies afforded by that position. Industry fundamentals appear to be sound, as does the viability of glass versus other forms of packaging.

The stable outlook is predicated on the expectation of reduced, or at least relatively unchanged, asbestos cash payments throughout the intermediate term as well as the absence of mandatory cash pension payments. The ratings outlook reflects some tolerance within the existing ratings categories for moderate fluctuations in credit statistics. However, the outlook and the fundamental rating are sensitive to further deterioration in the ratio of both free cash flow after asbestos payments to total debt, and/or EBITDA less capital expenditures to total interest expense (including the cash dividend on preferred debt of $21.5 million per annum). Moreover, debt financed acquisitions, any material ramp up in capital spending outside Moody's expectations, and/or the absence of improved returns on assets could also negatively affect the ratings outlook. Conversely, sustained organic improvement in the business fundamentals leading to debt reduction and improved coverage of fixed charges could migrate the ratings outlook to positive.

Pro-forma as of FYE 12/31/02 for the proposed debt transactions, financial leverage is high with total adjusted debt to EBITDA at approximately 4.7 times. Total debt is adjusted to include the estimated $553 million remaining asbestos liability at 12/31/02 plus the $452 million preferreds. Pro-forma adjusted debt exceeds O-I's $5.6 billion total consolidated revenue. Pro-forma EBITDA less capital expenditures coverage of total interest expense is thin at approximately 1.9 times. Free cash flow as a percentage of total adjusted pro-forma debt is low at less than 1%, and at current run-rate financials, that relationship is likely to remain weak for the intermediate term.

The confirmation of the B1 rating for the existing credit facility reflects its senior position in the capital structure. Ample collateral coverage supports a rating one notch above the B2 senior implied rating. The borrowers are Owens-Brockway, other domestic subsidiaries of O-I Group, and certain foreign subsidiaries including those in Australia and Canada. Outstandings are secured by a first priority pledge of substantially all personal, mixed and real property of the domestic borrowers and guarantors including 100% of capital stock and intercompany notes of domestic subsidiaries and 65% of the capital stock of certain first-tier foreign subsidiaries. Additional security consists of a first priority pledge of the remaining capital stock of first-tier subsidiaries and of all personal, mixed and real property of the Australian borrower, Australian guarantors, and to the extent allowable, those in the United Kingdom.

Unconditional joint and several guarantees from O-I Group and its domestic direct and indirect subsidiaries, as well as guarantees from certain foreign subsidiaries -- to the extent allowable, support the facility.

The B1 rating assigned to the proposed $450 million senior secured notes and the ratings upgrade to B1 from B2 of the existing senior secured notes reflect adequate residual collateral coverage after giving effect to outstandings under the secured credit facility. The rating incorporates the effective subordination to certain obligations under the proposed credit facility, which is secured by assets and capital stock pledged by foreign subsidiaries that are not available to secure the notes. Such exposure is reportedly restricted to a sub-limit of approximately $700 million and secured by collateral estimated at $1.1 billion (excess value would then be made available to the collateral pool securing the notes).

The B2 rating assigned to the proposed $350 million senior unsecured notes to be issued at Owens-Brockway reflects their effective subordination to approximately $3.9 billion pro-forma secured debt. The rating also gives consideration to sizable accrued asbestos, tax, and wage expenses totaling approximately $500 million. The rating acknowledges seniority over the existing senior unsecured notes issued at O-I. The proposed unsecured notes are to be guaranteed on a senior unsecured basis by O-I Group and its subsidiaries.

The confirmation of the B3 rating of the existing senior unsecured notes at O-I reflects the effective subordination to a sizable amount of secured debt outstanding at closing and also reflects the structural subordination to unsecured obligations at Owens-Brockway. The notching of the ratings between the secured debt at B1 and the proposed unsecured Owens-Brockway notes at B2 reflects the probability of impairment, in a distress scenario.

The ratings upgrade to Caa1 from Caa3 for the existing convertible preferreds reflects Moody's view of O-I's enterprise value as sufficient to support this debt. The Caa1 rating continues to reflect deep subordination to senior debt.

Owens-Illinois, Inc. is a Toledo, Ohio based leading global manufacturer of glass containers and plastics packaging products. Approximately one of every two glass containers made worldwide is manufactured by O-I, its affiliates, or licensees. For the year ended 12/31/02, O-I generated net sales of approximately $5.6 billion and EBITDA of approximately $1.3 billion.

New York
Julia Turner
Managing Director
Junk Bond
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kendra M. Smith
VP - Senior Credit Officer
Junk Bond
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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