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Rating Action:

MOODY'S ASSIGNS (P)Baa3 RATINGS TO LUBRIZOL'S NEW CREDIT FACILITY AND $1.1 BILLION IN NOTES; EXISTING RATINGS REMAIN UNDER REVIEW PENDING COMPLETION OF REFINANCING ACTIVITIES

14 Sep 2004
MOODY'S ASSIGNS (P)Baa3 RATINGS TO LUBRIZOL'S NEW CREDIT FACILITY AND $1.1 BILLION IN NOTES; EXISTING RATINGS REMAIN UNDER REVIEW PENDING COMPLETION OF REFINANCING ACTIVITIES

Approximately $2.5 Billion of Debt Securities Affected.

New York, September 14, 2004 -- Moody's Investors Service has assigned (P)Baa3 ratings to the new $1.075 billion guaranteed senior unsecured revolver and term loan, and $1.1 billion of guaranteed senior unsecured notes of the Lubrizol Corporation. Lubrizol's existing ratings remain under review for possible downgrade pending the completion of the refinancing, which includes the issuance of at least $425 million of equity. In June, Lubrizol purchased Noveon International Inc. (Noveon) for roughly $1.9 billion, which includes costs related to the transaction and is net of roughly $100 million of cash on the balance sheet. If the permanent financing that has been announced by Lubrizol is completed successfully, Moody's would likely confirm Lubrizol's Baa3 senior unsecured ratings and the outlook would be stable.

Ratings assigned:

Lubrizol Corporation

Guaranteed Senior Unsecured Revolving Credit Facility; $500 million -- (P)Baa3

Guaranteed Senior Unsecured Term Loan Facility; $575 million -- (P)Baa3

Guaranteed Senior Unsecured Notes due 2009; $400 million -- (P)Baa3

Guaranteed Senior Unsecured Notes due 2014; $400 million -- (P)Baa3

Guaranteed Senior Unsecured Notes due 2034; $300 million -- (P)Baa3

Ratings Remaining Under Review For Possible Downgrade:

Lubrizol Corporation

Senior unsecured notes due 2008 and 2025; $300 million -- Baa3

Lubrizol's Baa3 ratings are supported by a relatively stable portfolio of businesses, solid operating margins and the anticipation of a significant equity contribution to finance the acquisition of Noveon. The ratings reflect Moody's expectation that the combined businesses can generate upwards of $550 million of EBITDA and over $150 million of free cash flow over the next four quarters, excluding one-time costs related to the transaction and the business integration. Moreover, Moody's estimate of free cash flow includes $30-40 million per year from the utilization of Noveon's net operating loss carry-forwards; this benefit is expected to continue for the next two to three years. Over the past several years the combined businesses have been generating in excess of $100 million of free cash flow in a weak operating environment. Both Lubrizol's and Noveon's businesses continue to perform well in 2004. Furthermore, the ratings anticipate that management will avoid any meaningful acquisitions over the next two years and use the vast majority of free cash flow, and proceeds from divestitures, to repay debt. The ratings do not incorporate any significant synergies from the integration of these two companies. As with most large specialty chemical transactions there is limited direct overlap and synergies tend to be small relative to the size of the assets acquired. However, Moody's believes that Lubrizol has reduced the level of integration risk by retaining Noveon's business managers and merging Lubrizol's existing industrial operations into Noveon.

The ongoing review related to Lubrizol's existing debt will continue until Lubrizol issues at least $425 million of equity and the indentures are modified to provide the same guarantees as those included in the new bank facility. The company expects to complete both of these contingencies by the end of the month. Lubrizol has announced plans to issue 13 million common shares. Even with a modest discount to the current share price (shares are currently trading at under $36), this offering should generate between $425 -- 450 million; and with the over-allotment, proceeds to Lubrizol could rise toward $500 million. The $1.1 billion of new notes are expected to price shortly after the equity is sold.

The new $500 million revolving credit facility and $575 million term loan have as preconditions, the issuance of $425 million of common equity and $1 billion of new senior unsecured notes. Once the facility becomes effective, there are no ratings triggers and covenants are set at levels that the combined company should have no difficulty meeting. According to Moody's projections there should be at least a $75 million EBITDA cushion under the financial covenants.

The Baa3 ratings also reflect Moody's belief that the combined company can generate upwards of $350 million operating profit, excluding expenses related to the integration, over the next four quarters and that EBIT to interest will remain near 3.5 times on pro forma basis. Furthermore, based on Moody's analysis Lubrizol should be able to generate credit metrics that support the Baa3 rating, including retained cash flow to total debt of roughly 20% and free cash flow to total debt of 10%, on a pro forma basis. Free cash flow is defined as cash flow from operations less capital expenditures and dividends; retained cash flow is free cash flow plus capital expenditures and the add-back of any change in working capital.

Second quarter results for Lubrizol were positively impacted by acquisitions, but organic growth was robust as well; overall revenues, excluding Noveon, grew by over 18% versus the prior year. Lubrizol's operating profits, excluding Noveon, rose by $13 million, or nearly 25%, from the second quarter of 2003. Lubrizol's results are benefiting from higher volumes and timely price increases that have largely offset rising feedstock costs. Moody's believes that the timing of this transaction mitigates some of the downside risk. A recovery in the US industrial economy is providing positive momentum for the combined company in 2004 and Moody's believes that this should continue through 2005. However, failure to achieve the financial metrics cited above could have negative consequences for the company's ratings. Initially, Lubrizol will be weakly placed in the ratings category. Hence, any significant shortfall versus projected results over the next 6-9 months could result in a negative rating action. Moody's believes that there will be limited upside pressure on the ratings even if the company's financial performance exceeds Moody's projections until debt levels fall below $1.5 billion.

Noveon's major businesses that are complementary to Lubrizol's existing industrial operations include Personal Care and Pharmaceuticals and the majority of the Performance Coatings business; together Moody's believes these operations constitute roughly 40% of Noveon's sales. Noveon's Specialty Plastics business has good margins, but no overlap with Lubrizol's operations. In Moody's opinion, several businesses that offer no synergies and are minimal contributors to the bottom line could be divested to accelerate debt reduction. However, a valuation is uncertain due to limited information. Management has said that it could divest businesses that generate $300-500 million in sales.

The Lubrizol Corporation, headquartered in Wickliffe, OH, is a leader in the worldwide market for additives used in transportation lubricants, including engine oils, automatic transmissions fluids and gear oils. Lubrizol also manufactures additives for industrial lubricants and specialty chemicals that enhance the properties of coatings, inks and personal care products. Lubrizol reported $2.0 billion in sales for fiscal 2003.

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

New York
John Rogers
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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