MOODY'S CONFIRMS A2 LONG-TERM DEBT AND PRIME-1 COMMERCIAL PAPER RATINGS OF ATLANTIC RICHFIELD COMPANY; UPGRADES SENIOR DEBT RATINGS OF UNION TEXAS PETROLEUM HOLDINGS, INC. TO A2
New York, 06-05-98 -- Moody's Investors Service confirmed the A2 long-term debt and Prime-1 commercial paper ratings of the Atlantic Richfield Company (ARCO) and its guaranteed subsidiaries, concluding a review for possible downgrade announced on May 4, 1998. The rating confirmation, as well as a stable rating outlook, reflects the company's intended near-term reduction in its stake in ARCO Chemical Company from 83.2% to 50%, which should yield after-tax cash proceeds to ARCO in the area of $1.3 B. Proceeds will be used to reduce debt incurred in its all cash $3.3 billion tender offer to acquire Union Texas Petroleum Holdings, Inc. (UTP), which includes approximately $850 million of debt and preferred stock to be assumed from UTP. Concurrently, Moody's also upgraded UTP's long-term debt rating to A2 from Baa3, reflecting their expected assumption by ARCO or near-term refinancing upon consummation of the acquisition and the ARCO Chemical sell-down.
The UTP acquisition will increase ARCO's reserve base about 14%, adding approximately 573 million proved barrel-of-oil equivalent reserves with current production, a high degree of operational overlap, and opportunities for development and cost efficiencies. The UTP properties are expected to generate good cash flow and provide further international upstream opportunities for ARCO. However, near-term profitability will be constrained by relatively high amortization of the purchase price on the reserves, many of which are mature producing assets.
While the all-cash transaction will significantly increase ARCO's near-term debt funding requirements, the sale of the ARCO Chemical stake will considerably mitigate ARCO's increased financial leverage. Equity accounting will also deconsolidate some $1 billion of ARCO Chemical debt from the parent balance sheet, aligning accounting treatment with the standalone nature of those debt obligations and ARCO's reduced influence over ARCO Chemical. In addition, ARCO is actively engaged in efforts to sell other assets that could further reduce its debt, leading to a stronger balance sheet in the near-to-medium term.
Ratings confirmed include the A2 notes, medium-term notes, debentures and counterparty ratings for ARCO and its guaranteed subsidiaries, and the Prime-1 commercial paper ratings for ARCO and its guaranteed subsidiaries, ARCO Coal Australia and ARCO British Limited. UTP's securities upgraded include its senior and medium-term notes, raised to A2 from Baa3, and its preferred stock, raised to "a3." (The Baa1 long-term debt and Prime-2 ratings for Vastar Resources, Inc., an 82.2% owned exploration and production subsidiary, were previously confirmed with a stable outlook.) ARCO Chemical's long-term debt was downgraded to Baa1 from A3 on June 3, 1998, and both its long-term debt and Prime-2 commercial paper ratings remain under separate review.
Atlantic Richfield Company, a major integrated oil company, is headquartered in LosAngeles, California. Union Texas Petroleum Holdings, Inc. and Vastar Resources, Inc. are located in Houston, Texas. Arco Chemical Company is headquartered in Newton Square, Pennsylvania.
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