MOODY'S DOWNGRADES DEBT OF LUBRIZOL TO A2 DUE TO INCREASED LEVERAGE
Moody's Investors Service downgraded its ratings on The Lubrizol Corporation's long-term senior unsecured debt to A2 from A1. Moody's also assigned a (P) A2 rating to Lubrizol's recent $200 million senior unsecured shelf registration. The company's rating for commercial paper was confirmed at Prime-1. The downgrade completed the ratings review begun on June 25, 1998 prompted by our expectation that Lubrizol's financial leverage would remain elevated in support of acquisitions and share buy-backs.
Ratings assigned:
Senior unsecured debt at A2; Senior unsecured shelf at (P) A2
Rating confirmed:
Commercial paper at Prime-1
The downgrade reflects Lubrizol's increase in debt and the likelihood that the company's elevated debt levels will be sustained, according to Moody's. Leverage increased as a result of acquisitions designed to consolidate the transportation lubricant additives market and grow the industrial lubricants business.
Moody's said the A2 ratings are supported by Lubrizol's leading technology and market positions in additives for transportation lubricants (e.g., additives for gasoline and diesel engine oils, automatic transmission fluids, gear oils, gasoline and diesel fuels, etc.) and is tempered by the declining fundamentals of this industry, including minimal sales volume growth combined with increasing competitive pressure and the resulting impact on margins. The ratings also reflect our expectation that management will maintain its current leverage and avoid a sustained increase in leverage to support additional acquisitions or share repurchases.
The recent acquisition of BP's Adibis business adds to Lubrizol's product portfolio and both further consolidates the industry and increases Lubrizol's market share in transportation lubricant additives, to nearly 40%. Moody's believes this business will continue to generate a relatively stable earnings and cash flow stream due to Lubrizol's market share and its position as an independent supplier to the industry (i.e., not a subsidiary of an oil company).
The long-term outlook for the transportation lubricant additives business has caused Lubrizol to look for growth in new markets. Although entering new markets is often risky, Lubrizol has been disciplined about investing in markets where there is some technology or technical overlap with its core businesses. In addition, these new markets have tended to be relatively small and fragmented; however, qualification testing is substantially less costly than in the transportation lubricants market. Notwithstanding the medium-term detrimental effect on cash flow, Moody's believes that further diversification into the industrial lubricants will ultimately provide increased stability to Lubrizol's earnings and cash flow.
The Lubrizol Corporation, which is headquartered in Wickliffe, OH, is a leader in the worldwide market for additives used in transportation lubricants including gasoline and diesel engine oils, automatic transmissions fluids and gear oils. Lubrizol also manufactures additives for gasoline and diesel fuels and industrial lubricants. Lubrizol reported $1.7 billion in sales for fiscal 1997.
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