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10 Jan 2002
MOODY'S ASSIGNS B2 RATING TO NEW $300 MILLION NOTES OF OWENS-BROCKWAY; OUTLOOK FOR OWENS-ILLINOIS REMAINS NEGATIVE
Approximately $ 5.4 Billion of Debt Securities Affected.
New York, January 10, 2002 -- Moody's Investors Service assigned a B2 rating to the new $300
million 144A notes with registration rights to be issued by Owens-Brockway
Glass Container Inc ("Owens-Brockway"), a subsidiary of Owens-Illinois,Inc.
("Owens-Illinois"), and confirmed the ratings of Owens-Illinois.
The outlook remains negative. The ratings reflect the strong competitive
position of the company in the glass container industry, but also
Owens-Illinois' high leverage, its thin free cash flow relative
to its debt load and the threat to this free cash flow represented by
rising asbestos litigation-related payments. Assignment
of the rating to the new notes reflects the somewhat lower quality of
the collateral and guarantee package granted to the new bondholders in
comparison to that already granted to existing bank lenders.
B2 for senior implied
B3 for senior unsecured debt
(P)B3 for senior debt shelf registration
(P)Caa2 for subordinated debt shelf registration
Owens-Brockway Glass Container Inc. and other subsidiaries
B1 for $1.5 billion term loan maturing March 31, 2004
B1 for $3 billion revolving credit facility maturing March 31,
Owens-Brockway Glass Container Inc.
B2 for new $300 million 144A notes with registration rights,
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. Recently, however,
the limited ability of Owens-Illinois to pass on energy cost increases
has resulted in operating income volatility. After a decline in
EBIT margin from 16.4% in 1999 to 16.1% in
2000, Moody's expects that a further decline will have occurred
in 2001, in spite of the productivity enhancements in recent years.
In the coming quarters, the company should benefit from the price
adjustment formulas embedded in many contracts, as well as the renegotiation
of other contracts, which should allow for some passing on of cost
However, Moody's expects that free cash flow will continue to be
constrained relative to the company's debt level. Debt has remained
high since the 1998 purchase of assets from BTR, as a result of
substantial levels of capital spending in 1999 and 2000 and of creeping
asbestos-related litigation payments. Asbestos payments
remain small relative to the company's operating income, because
the company's exposure is limited to its ownership of a small company
until the end of the 1950s. However, the numbers of filings
and of cases pending have risen since 1997. 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. Moody's believes
that such payments by Owens-Illinois could continue to increase
over the medium term, impacting free cash flow.
Currently, borrowers under the bank facilities are several domestic
and overseas subsidiaries of Owens-Illinois. The collateral
granted to lenders includes substantially all operating assets of Owens-Illinois'
domestic subsidiaries and certain foreign subsidiaries. All bank
borrowings are cross-guaranteed. At the time of issuance
of this bank debt, Moody's considered that the collateral and guarantee
package granted to the banks warranted a notching up of one from the senior
implied rating. Moody's also considered that the resulting structural
subordination of existing notes warranted a notching down of one from
the senior implied rating, in spite of the second lien on the intercompany
debt and stock owned by two principal domestic subsidiaries granted to
these existing notes.
The borrower under the contemplated new notes will be Owens-Brockway.
These notes will be secured and guaranteed. Regarding the domestic
glass and plastic activities, new notes will share with bank debt
in collateral from substantially all assets and in guarantees from subsidiaries.
Regarding international glass divisions, new notes will not benefit
from collateral or guarantees, whereas bank debt benefits from guarantees.
In addition, all assets of the UK and Australian subsidiaries have
been pledged under the terms of the bank facility, but will not
be pledged to the new notes. The proportion of total Owens-Illinois
operating income coming from divisions in which bank debt benefits from
guarantees or collateral but new notes will not, is approximately
40%. Moody's considers that the difference in collateral
and guarantee protection between bank debt and the contemplated new notes
is sufficiently high to create structural subordination of the new notes
vis-a-vis the bank debt. At the same time,
new notes will be better protected than existing notes, thanks to
the strength of their collateral and guarantee package. This degree
of protection leads Moody's to assign to the new notes a rating at the
level of the senior implied rating.
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.
Moody's Investors Service
VP - Senior Credit Officer
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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