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Rating Action:

MOODY'S CONFIRMS BORDEN CHEMICAL, INC.'S B2 SENIOR UNSECURED RATING; OUTLOOK NEGATIVE

19 Jun 2003
MOODY'S CONFIRMS BORDEN CHEMICAL, INC.'S B2 SENIOR UNSECURED RATING; OUTLOOK NEGATIVE

Approximately $488 million of Long-Term Debt Affected

New York, June 19, 2003 -- Moody's Investors Service confirmed the B2 rating of Borden Chemical Inc.'s (Borden) senior unsecured notes and debentures. Moody's also assigned a B2 rating to the company's new $34 million of senior unsecured industrial revenue bonds (IRBs), due 2009 issued in the Parish of Ascension, Louisiana. Proceeds from the offering will be used to redeem the existing IRBs. The new IRBs will not be backed by a letter of credit. The outlook remains negative.

Ratings Assigned:

Senior unsecured industrial revenue bonds, $34 million due 2009 -- B2

Ratings Confirmed:

Senior unsecured notes and debentures, $488 million maturing 2016 through 2023 -- B2

Senior Implied: B1

Issuer Rating: B2

The ratings continue to reflect Borden's high leverage with adjusted debt (including notes payable to affiliate net of restricted cash) to EBITDA of 6.2 times, negative book equity, modest interest coverage, deteriorated creditor protection measurements, and the company's thin, albeit trough-level, LTM EBIT margins of 3.3%. The ratings also take into account increased production costs stemming from higher feedstock and energy costs, and the uncertain timing of a recovery in the company's end-markets. The ratings are supported by the company's leading market positions in resins (for the forest products industry and industrial applications) and formaldehyde, a favorable debt maturity profile, recent improvements in product volumes and pricing, and improved liquidity following the IRB issuance. Additionally, the ratings assume that the company will remain committed to debt reduction for the intermediate-term and that volumes will continue to improve.

The negative outlook reflects our expectations that raw material prices will continue to pressure operating margins and that credit metrics could somewhat worsen in the near-term. A downgrade could result from deterioration in operating results, liquidity, or creditor protection measurements, or if the company reverses its focus on debt reduction. Conversely, the ratings could be raised if the company demonstrates sustained improvement in operating margins, credit metrics, and book equity.

Borden's exposure to natural gas is a concern for Moody's given the sustained high levels of North American natural gas prices likely over the next year. Moody's notes that natural gas is a key feedstock for the company's primary raw materials - methanol and urea. While Borden benefits from diverse global manufacturing locations including some with access to low-cost natural gas, more than half of the company's 48 manufacturing facilities are located in the U.S. Additionally, the ratings recognize that a significant portion of the company's sales are under contracts that provide for quarterly price adjustments with a lag for raw material price changes. This lag is reflective in the company's quarter ended March 2003 results where EBIT (before corporate expenses) declined to $27 million in 1Q03 from $34 million in 1Q02 despite an 18% increase in revenues over the same period. Additionally, Moody's is concerned that continuing economic weakness in North America and increasing weakness in Europe could reverse recent improvements in volume. Based on reported LTM EBITDA of $90 million as of March 31, 2003, debt to EBITDA was 6.2 times. EBITDA coverage of interest expense was 1.9 times over the same period.

Moody's considers the company's liquidity adequate for near-term operating requirements. As of March 31, 2003, Borden had unrestricted cash of $16 million and pro forma revolving credit availability of $98 million, adjusted for the cancellation of $34 million of LOCs issued under the revolver to support the existing IRB. Moody's notes that the fixed charge covenant is inoperative when net availability exceeds $75 million.

Borden had negative free cash flow (operating cash flow less capital expenditures) of $28 million in 2002. Moody's notes that the company's ability to improve cash flow is constrained by several factors. Besides the potential for weaker profitability from higher production costs, capital expenditures are expected to increase to $45 million in 2003 from $38 million in 2002. Further pension, insurance, and litigation cost increases could pressure cash flow as well. Moody's also notes that the company's pension was underfunded by $72 million as of December 31, 2002. Pension funding requirements are expected to be zero in 2003 and $4 to $5 million in 2004. Offsetting these concerns are steps the company is taking to reduce costs and improve cash flow. For instance, in April 2003, the company amended its post-retirement medical benefit plan, which is expected to reduce annual cash requirements by $10 million.

Borden Chemical, Inc., based in Columbus, Ohio, is a chemical producer of resins, formaldehyde, and coatings. 2002 revenues totaled $1.2 billion.

New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
David Neuhaus
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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