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Rating Action:

MOODYS CONFIRMS ENGELHARD'S RATINGS AFTER COMPANY SAID IT WILL BUY PART OF MINORCO'S STAKE; SENIOR UNSECURED AT A3

02 Mar 1999
MOODYS CONFIRMS ENGELHARD'S RATINGS AFTER COMPANY SAID IT WILL BUY PART OF MINORCO'S STAKE; SENIOR UNSECURED AT A3 Moody's Investors Service confirmed the A3 ratings on Engelhard's senior unsecured debt and confirmed the company's commercial paper rating at Prime-2. The rating action follows the announcement by the company that it has reached agreement with Minorco to buy 18 million shares of Engelhard stock owned by Minorco, with the balance (about 28 million shares) of Minorco's stake to be sold through a secondary offering. This completes the review begun on October 22, 1998 when Minorco announced its plans to divest its 31.8% ownership stake in Engelhard.


Ratings confirmed today are as follows:

-- senior unsecured notes, medium term notes, industrial revenue bonds at A3

-- shelf registration for senior notes at (P) A3

-- shelf registration for subordinated notes and convertible subordinated notes at (P) Baa1

-- Prime-2 rating for commercial paper


Moody's said the net cost to Engelhard to finance the transaction is expected to be roughly $300 million, after expenses and costs are reimbursed by Minorco, increasing Engelhard's debt and leverage in the near term. Confirmation of the rating anticipates that the company will place a high priority on restoring the balance sheet with cash from operations and asset sales. Moody's notes the company expects to have available cash proceeds from divestiture of certain assets, some of which will likely be sold in the near term while other assets are likely to be sold in the medium term. Asset sales alone are expected to partially offset the affects of the stock purchase.


The ratings confirmation anticipates that the company will adhere to its previous conservative financial policies targeting leverage in the high 30% range over the longer term. Given Engelhard's business risk profile, Moody's said that the A3 ratings would be supported longer term by retained cash flow-to-total debt of roughly 40% and interest coverage in the 6 to 7 times range. Adhering to its leverage targets would likely result in these debt protection measures, the rating agency added.


Upon completion of the secondary offering of by Minorco of the remaining 28 million shares, Engelhard's commercial relationship with Minorco will no longer be pertinent to the credit. Moreover, elimination of such a large shareholder nullifies a modest level of event risk in the credit.


Moody's noted that the A3 and Prime-2 ratings are supported by Engelhard's leading technology and market positions in its existing core businesses. Engelhard is the global leader in environmental auto emission catalysts, the outlook for which is favorable as this business should do well even in a lackluster auto environment due to regulatory driven emission changes and reduction in lead used in gasoline on a global basis.


Engelhard also holds leading market positions in catalysts sold to the refining and petrochemical industries and in the additives business, which includes kaolin and attapulgite-based additives used primarily in paper coatings, plastics and paints.


Despite the heavy reliance on the cyclical auto and paper industries, Engelhard's historical earnings and cash flow tend to be reasonably stable, resulting largely from good product and geographic diversification. The catalysts and additives segments generate strong operating margins, reflective of the value added nature of most products sold, as well as restructuring efforts, Moody's noted.


Moody's said that offsetting factors in the credit include the modest scale of Engelhard's combined businesses, the relatively concentrated customer base in the important auto and petroleum catalyst sectors, and the heavy reliance on sourcing a large portion of precious metal raw materials that are vital to Engelhard's business from Russia and South Africa.


Additionally, the performance characteristics of the Engineered Materials & Industrials Commodities Management segment, which accounted for about 55% of 1998 sales, does not contribute to the high earnings quality generally evident in the other two segments. Performance in this segment tends to be less predictable and can be impacted by market price movements in precious metals by the general level of industrial activity.


Engelhard Corporation, based in Iselin, New Jersey, is a global leading supplier of auto emission catalysts; specialty catalysts, pigments and chemicals; and engineered materials and related services sold to a broad range of industries.

No Related Data.
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