MOODY'S CONFIRMS DOW CHEMICAL'S RATINGS; PLACES UNION CARBIDE'S RATINGS ON REVIEW FOR POSSIBLE UPGRADE
Moody's Investors Service confirmed Dow Chemical's ratings and placed Union Carbide's ratings on review for possible upgrade. These actions follow the announcement by the two companies that they plan a stock-for-stock merger, which they expect to close by the first quarter of 2000. The merger is subject to approval by Union Carbide stockholders and the US and EC regulatory authorities. Moody's said the confirmation of Dow Chemical's ratings reflects the conservative stock financing and the positive attributes in the deal, including significant cost and marketing synergies, as well as complimentary technology, products and geographical spread.
The review of Union Carbide's long-term ratings will focus on the future structure of the organization and whether Dow will legally assume or otherwise support the debt obligations of Union Carbide. Assuming the deal is consummated more or less in its current proposed form, Union Carbide's long term ratings are likely to be rated at or near the level of Dow's ratings, said Moody's.
Ratings affected by today's announcement are as follows:
Dow Chemical ratings confirmed:
Notes, debentures, industrial revenue bonds, counterparty rating - all confirmed at A1
Commercial paper rating - confirmed at Prime-1
Union Carbide ratings placed on review for possible upgrade:
Notes, debentures, industrial revenue bonds, counterparty rating - currently Baa2,
Commercial paper rating - currently Prime-2,
Moody's said the merger with Union Carbide builds on Dow's positive credit factors, which include good depth and breadth of a well-diversified and well-positioned portfolio in chemicals and plastics, and a leading position in technology. Notwithstanding the positive characteristics in this deal, as well as the favorable results and trends in Dow's performance segments, earnings cyclicality continues to be significant in Dow's risk profile.
While the merger will not significantly reduce the cyclical portion of the portfolio or the cyclical nature of products sold, the expected cost synergies and the strengths of the combined entities should allow better profitability in basics over the cycle. Dow expects to achieve $500 million in cost savings in two years following the merger.
The confirmation of the A1 ratings is supported by a strong pro forma financial profile with retained cash flow-to-total debt of about 40% and debt-to-cap in the low-to-mid 40% range. Combined sales are about $24 billion with debt of roughly $7.3 billion. Moody's expects that Dow will continue to adhere to conservative financial policies.
Moody's believes a merger with Union Carbide is an excellent fit with the businesses and strategic direction of Dow. As Moody's has stated in the past, the rating agency views Union Carbide as one of the few names in the industry with the requisite core competencies to be a successful global player in chemicals, specifically in the ethylene chain. Union Carbide benefits from a history rich in technology and a strong track record of patent development and processing know-how. Strengths in process technology and licensing, good production economies, and leading market shares position Union Carbide as a low cost producer. Moreover, its cost position is enhanced by low-cost feed-stocks, particularly in Alberta Canada, Kuwait and Malaysia, where a major project is currently under construction.
Moody's added that it believes the transaction is consistent with the trends in the industry, where consolidation is being driven by increasing competitiveness and slower growth in customer markets. Industry consolidation is expected to continue given the growing importance of technology, global reach and world-class production capabilities. Dow's A1 ratings incorporate a moderate level of event risk, as Moody's believes there is a reasonable chance that Dow might participate in additional consolidating events.
Separately, the outlook on Dow's long term debt remains negative due to breast implant litigation risk. Moody's said it would consider changing the outlook to stable once Dow Corning's Plan of Reorganization is approved by the courts, which could occur in the next few weeks.
Headquartered in Midland, Michigan, Dow Chemical's widely diversified chemicals, plastics and agricultural product operations comprise one of the world's largest chemical enterprises with 1998 sales of roughly $18.6 billion.
Union Carbide, headquartered in Danbury, Connecticut, is a global market leader in polyethylene, ethylene oxide, ethylene glycol, alcohols and other downstream intermediates and specialty chemicals. Union Carbide reported $5.6 billion in sales in 1998.
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