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Rating Action:

MOODY'S ASSIGNS B2 TO OWENS-BROCKWAY GLASS CONTAINER'S PROPOSED SR NOTES AND RAISES EXISTING NOTES AND PREFERRED STOCK RATINGS ONE NOTCH; LIQUIDITY RATING UPGRADED TO SGL-2 FROM SGL-3; RATINGS OUTLOOK IS STABLE (B2 SENIOR IMPLIED RATING AFFIRMED)

22 Nov 2004
MOODY'S ASSIGNS B2 TO OWENS-BROCKWAY GLASS CONTAINER'S PROPOSED SR NOTES AND RAISES EXISTING NOTES AND PREFERRED STOCK RATINGS ONE NOTCH; LIQUIDITY RATING UPGRADED TO SGL-2 FROM SGL-3; RATINGS OUTLOOK IS STABLE (B2 SENIOR IMPLIED RATING AFFIRMED)

Approximately $7 billion of debt securities affected

New York, November 22, 2004 -- Moody's Investors Service assigned a B2 rating to the proposed senior unsecured issuance of approximately $650 million at Owens-Brockway Glass Container, Inc. ("Owens-Brockway") and concurrently raised the ratings of existing notes and convertible preferred stock at the parent company, Owens-Illinois, Inc. ("O-I"), while affirming the enterprise's B2 senior implied rating. The ratings actions positively reflect the cumulative improvements in consolidated free cash flow across geographies, notably in North American glass, which continues to be under pressure, as well as acknowledge the reduction in financial leverage (specifically, permanent reductions in senior secured debt). The revised ratings are consistent with the ratings prior to the $1.45 billion senior secured debt acquisition financing for BSN Glasspack, S.A. ("BSN"). The ratings incorporate the likely benefits received from the proposed issuance and subsequent debt restructuring, which should allow access to cash at the BSN subsidiaries and facilitate the pooling of O-I's European businesses.

O-I's financial performance since Moody's prior rating action in February 2004 has fully met and somewhat exceeded expectation, despite the challenging global business environment with significantly increased utility, raw material, and other operating costs, pricing pressures, and some -- albeit limited -- adverse conversions from glass to alternative forms of packaging. Results evidence new management's ability and commitment to address cash leakage through improved working capital management and more judicious capital spending while achieving material, voluntary debt reduction throughout the intermediate term (over $150 million of debt has been paid with free cash flow thus far in fiscal 2004).

Additionally, the company's liquidity and general credit profile has been enhanced by the approximately $1.3 billion of combined proceeds from the divestiture of O-I's blow-molded plastics business (sold to Graham Packaging Company, L.P. for roughly $1.2 billion) and other assets used for debt reduction. The ratings upgrades, including the change in the Speculative Grade Liquidity rating to SGL-2 from SGL-3, also reflect Moody's revised expectations of improved financial flexibility in the near term through the realization of integration synergies, benefits from portfolio changes, leveraging improved infrastructure, and on-going working capital management. A more focused plastics business exclusively devoted to the solid-margin, higher-growth rate healthcare containers and closures (over 10% of consolidated EBITDA) also contributes to O-I's bolstered financial profile.

Today, Moody's took the following ratings actions for O-I and its subsidiaries:

Assigned a B2 rating to Owens-Brockway's proposed senior unsecured notes of approximately $650 million, due 2014, denominated in both US dollar and Euro

Upgraded $2.1 billion senior secured notes at Owens-Brockway, due 2009 -2012, to B1 from B2

Upgraded $441 million 8.25% senior unsecured notes at Owens-Brockway, due 2013, to B2 from B3

Upgraded $1.4 billion senior unsecured notes at O-I, due 2005 -- 2018, to B3 from Caa1

Upgraded $452.5 million convertible preferred stock at O-I, to Caa1 from Caa2

Affirmed $1.7 billion senior secured credit facility consisting of a $600 million revolver and $1.1 billion term loans at B1

Affirmed senior implied rating at B2

Upgraded senior unsecured issuer rating at O-I to B3 from Caa1 (non-guaranteed exposure)

Upgraded Speculative Grade Liquidity rating to SGL-2 from SGL-3

The ratings outlook is stable.

The existing ratings for BSN Glasspack, S.A. were affirmed and will be withdrawn upon completion of the proposed transactions in which proceeds from the intended Owens-Brockway senior issuance are intended to tender the outstanding Euro 160 million 9.25% senior subordinated collateralized notes, due 2009, at BSN Glasspack Obligation, S.A. (rated B2), and the Euro 140 million 10.25% senior subordinated notes, due 2009, at BSN Financing Co., S.A. (rated B3) and to pay related fees and premiums. Incremental proceeds are intended to be used to tender the existing $350 million 7.15% O-I senior unsecured notes, due 2005. If those funds are not available, O-I might draw under its existing revolver to finance the intended O-I tender and related fees, which could have negative consequence on the SGL-2 rating.

While over the intermediate term Moody's expects sustained improvement in consolidated free cash flow as a percentage of total debt adjusted to include outstandings under accounts receivable securitizations, asbestos liabilities, and under-funded pension obligations (the latter being relatively modest), the ratio remains in the low to mid single digits thereby constraining the B2 senior implied rating. Moreover, the rating continues to reflect the effects of charges taken in the fourth quarter of fiscal 2003 for the $750 million impairment of goodwill and the approximately $450 million increase in the asbestos reserve. High financial leverage (debt is 80% of consolidated revenue; roughly 4 time consolidated EBITDA) and relatively thin EBITDA less capital expenditures coverage of interest expense (around 2 times) coupled with sizable annual capital expenditures of over $450 million, continuing annual cash payments for asbestos in the $190 million range plus pension/OPEB contribution of around $30 million are also reflected in the enterprise rating.

However, as synergies are captured from the integration of BSN (costs are heavily front-loaded through the end of fiscal 2005) and O-I continues to evidence positive momentum in free cash flow generation and permanent debt reduction in the near term, the ratings outlook could change to positive from stable. Positive change in the ratings outlook is also sensitive to continued improvement in the level and quality of EBIT and operating margins by segment (with particular emphasis on European glass as lower margins at BSN are addressed and, North American glass, which is negatively impacted by excess capacity).

The upgrade of the Speculative Grade Liquidity rating to SGL-2 from SGL-3 reflects good liquidity given Moody's view of O-I's potential free cash flow generation, manageable mandatory debt maturities of approximately $390 million (includes the $350mm notes, due 2005), good average availability under the $600 million committed revolver, and improved cushion under financial covenants quarterly throughout the next twelve months (specifically, more headroom under the leverage hurdle given the sizable debt repayments). The liquidity rating benefits from the debt reductions made from the proceeds of divestitures. However, the rating does not reflect the use of proceeds from any further potential dispositions to reduce debt. The SGL-2 rating is supported by the existence of alternate sources of liquidity such as viable businesses and joint ventures which could be sold without material impairment to core enterprise value. (Refer to Moody's liquidity assessment published independently of this press release for further details on the SGL-2 rating).

The B1 ratings for the senior secured debt at Owens-Brockway reflect their priority position in the capital structure, the benefits and limitations of the global collateral sharing arrangement, and upstream guarantees from subsidiaries. The ratings are one notch above the B2 senior implied rating because we believe there would be full collateral coverage in a distress scenario. Moody's notes that there continues to be additional tangible collateral pledged by foreign subsidiaries that supports the credit facility and not the secured notes.

The B2 ratings for the senior unsecured notes at Owens-Brockway reflect the effective subordination to approximately $3.4 million of secured debt (bank debt includes outstanding letters of credit totaling approximately $150 million).

The B3 ratings for the senior unsecured notes at O-I and the Caa1 rating for the convertible preferred stock reflect the effective and contractual subordination to substantial total liabilities at the operating companies and gives consideration to the sizable asbestos liabilities at the holding company, O-I.

Headquartered in Toledo, Ohio, Owens-Illinois, Inc., through its subsidiaries, is one of the world's largest global manufacturers of glass containers and is also a leading manufacturer of healthcare packaging including prescription containers and medical devices, and closures including tamper-evident caps and dispensing systems. For the twelve months ended September 30, 2004, consolidated revenue was approximately $6.6 billion and EBITDA was approximately $1.4 billion.

New York
Patrick Finnegan
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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