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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
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
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
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
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.
Corporate Finance Group
Moody's Investors Service
Kendra M. Smith
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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