MOODY'S CONFIRMS RATINGS OF PENNZOIL-QUAKER STATE; ASSIGNS Ba3 RATING TO NEW UNSECURED NOTES; OUTLOOK NEGATIVE
Moody's Investors Service confirmed the senior implied and issuer ratings, as well as the ratings on existing bonds of Pennzoil-Quaker State. Moody's also assigned a Ba3 rating to the new $250 million senior unsecured notes of the company. The confirmation reflects the poor growth prospects for the motor oil category and its limited free cash flow relative to its indebtedness, as well as the market strengths of the company and the structural subordination of the new bonds. The outlook remains negative. Any lasting deterioration in volume or renewed margin pressure in the motor oil business could place pressure on the ratings.
8.65% notes due 2002, at Ba2
6.625% notes due 2005, at Ba2
6.75% notes due 2009, at Ba2
7.375% notes due 2029, at Ba2
senior implied, at Ba2
issuer rating, at Ba3
senior shelf, at (P)Ba3
subordinated shelf, at (P)B1
preferred shelf, at (P)B1
Ba3 for $250 million unsecured notes due 2008
Pennzoil-Quaker State's main product category is motor oil, sold either in bulk to the do-it-for-me segment or branded and packaged to the do-it-yourself segment. Over the last years, volume sold in the category had been buttressed by a rising number of cars and by a favorable economic climate that encouraged owners to spend on their cars. In recent quarters, consumer spending has become more restrained, especially regarding automotive budgets. This more unfavorable environment highlights the long-term negative factor of increasing engine efficiency, which results in consumers needing to change their oil less and less often. Moody's believes that this factor will continue to bring down volume sold in the category on the average over the long term.
In this environment, the company should continue to benefit from a number of strengths. It has divested all of its assets in the refining activity, which represented a drain of cash flow and managerial attention. It controls almost half of the growing motor oil do-it-for-me market, and almost 30% of the do-it-yourself segment. Its activity in car care consumer products should be boosted by steady consumer demand. Its brands have been nourished by steady advertising spending. It has potential for cost reduction from improvement in its supply chain.
However, the company's free cash flow - in spite of the board's decision to cut common stock dividend to $8 million - should remain limited relative to Pennzoil-Quaker State's debt. Current debt load is mostly the result of the merger between Quaker State and the motor oil and refining activities of Pennzoil. At $1.2 billion, it has increased from its $1.1 billion level at the time of the December 30, 1998 merger. At the end of June 2001, the ration of debt to last-twelve-month EBITDA stood at 4.25 (excluding restructuring and other charges).
Lenders in the new bank facility to be put in place by Pennzoil-Quaker State will benefit from security in all intangible assets of the company. As per their indentures, existing notes will share pari passu in the bank facility's collateral. While the granting of security represents a clear benefit for existing bondholders, Moody's does not view this collateral as providing sufficient coverage to warrant a notching up from the senior implied for existing bonds. The rating of the new notes is justified by their unsecured status and their structural subordination to the existing notes and the new bank loan.
Based in Houston, Texas, Pennzoil-Quaker State Company is a global automotive consumer products company.
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