MOODY'S ASSIGNS PRIME-2 RATING TO PENNZOIL-QUAKER STATE'S COMMERCIAL PAPER PROGRAM; CONFIRMS SENIOR UNSECURED RATING
Moodys' Investors Service assigned a Prime-2 short term rating to the $1 billion commercial paper program of Pennzoil-Quaker State ("PQS"), as well as long term ratings to an exempt facility revenue bond and the company's shelf registration. Pennzoil-Quaker State is the new entity to be formed from the merger of Quaker State and the motor oil and car care activity of Pennzoil. The ratings reflect the anticipated cost reductions to be derived from the merger, the entity's strong market position in the stagnant to declining motor oil market and the benefits expected from an enlargement of the product offering towards higher-margined car care products.
Baa2 for $12 million Atlas Project exempt facility revenue bonds due 2028
(P)Baa2 for senior shelf
(P)Baa3 for subordinated shelf
(P)"baa3" for preferred stock shelf
Prime-2 for commercial paper program
Baa2 for $1 billion senior unsecured bank facility
Baa2 for $100 million 6 5/8% notes due 2005
Rating outlook is updated as follows:
"The rating is stable. Moody's expects the management of Pennzoil-Quaker State to pursue a strategy of diversification of its product offering towards car care products, and to follow a conservative financial policy, in particular in the financing of its acquisitions, which should lead to an improvement of debt protection measures over time."
Motor oil, which will represent approximately half of the sales of Pennzoil-Quaker State immediately after the merger, is a product in stagnant to declining use in the United States, as improving engine technology increases the mileage interval required between oil changes. Moody's does not anticipate that this trend will reverse. However Pennzoil-Quaker State should benefit from the on-going long term shift away from the do-it-yourself market (where motor oil is purchased in traditional retail outlets) to the do-it-for-me (where motor oil is purchased as part of a service package in quick lube shops, service stations or repair garages). Pennzoil-Quaker State's market share in the do-it-for-me will be 49%. It will also be strong, but at a lower level, in the do-it-yourself, at 29%.
The company anticipates more than $100 million in cost reductions on an annual basis. Given the areas of activities in which these savings will be sought, Moody's considers the expected level of operating income improvement as highly achievable.
Pennzoil-Quaker State will control a portfolio of car care brands, many of which have leading market shares in their categories. These brands carry significantly higher gross margins than motor oil, and have better growth prospects. They should benefit from cross-selling opportunities with motor oil in the network of quick lube shops owned or franchised by the company. This network will be the largest in the U.S. The breadth of the portfolio offering should bring strength to the shelf and category management positions of Pennzoil-Quaker State, and should be widened over time by additional acquisitions in this sector.
The $1 billion revolving credit and competitive bid facility has a 364-day tenor, but can be converted at any time before maturity into a 1-year term loan at the company's option. The Baa2 rating on Quaker State's $100 million senior notes is based on the addition of Pennzoil-Quaker State as a co-obligor to this facility. The Baa2 rating on the Atlas project $12 million exempt facility revenue bonds is based on the irrevocable and unconditional obligation of Pennzoil-Quaker State to make payments covering the project's debt service obligations.
Quaker State Corporation is a consumer automotive products and services company. It is expected to merge with the operations of Pennzoil in the consumer automotive area to form a new company, to be called Pennzoil-Quaker State Company.
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