MOODY'S DOWNGRADES DEBT RATINGS OF AMCOR, GUARANTEED DEBT OF SUBSIDIARIES ALSO DOWNGRADED : OUTLOOK STABLE
Sydney, December 08, 1998 -- Moody's Investors Service has lowered the senior unsecured debt ratings of Amcor Limited's (Amcor) guaranteed subsidiaries to Baa1 and the commercial paper ratings to Prime-2. In addition, the senior subordinated debt rating of Amcor has been downgraded to Baa2 and its commercial paper rating to Prime-2. The ratings had been placed under review for possible downgrade on June 5, 1998. The ratings downgrades reflect deteriorating fundamentals in global packaging and paper markets and a more aggressive financial management approach on Amcor's part. The rating action also acknowledges the progress that Amcor has achieved in driving its businesses harder, arresting the decline in operating margins in a number of core businesses, its healthy level of backup facilities, and the strong position it enjoys in the Australasian packaging and paper markets. Moody's does not, however, expect that financial performance and capital strength will return to levels that would justify a higher rating despite management attempts to improve performance.
The ratings downgraded are:
Sunclipse Inc. (backed) - senior unsecured long term rating to Baa1 from A2
Twinpak Inc. (backed) - senior unsecured long term rating to Baa1 from A2
Amcor Finance (USA), Inc. (backed) - short term rating to Prime-2 from Prime-1
Amcor Limited - senior subordinated rating lowered to Baa2 from A3; short term rating lowered to Prime-2 from Prime-1
Moody's noted that business conditions over the last two to three years have been extremely difficult across most of Amcor's businesses. The globalisation of major packaging accounts has resulted in pressure on prices. The European market remains highly competitive, as does the North American market. World paper prices have been highly volatile, and combined with increasing pressure from imports in certain segments, have depressed margins in the Australian market. Amcor has suffered a combination of falling margins and significant abnormal expenses, resulting from the sale and closure of certain businesses.
Moody's went on to say that Amcor's financial policies could be considered aggressive given the apparent weakening of debt fundamentals. The company has persisted with a high dividend payout policy despite its poor operating performance during a period where debt levels have increased. This has contributed to a lessening of Amcor's financial flexibility. Since Moody's first assigned ratings for Amcor group companies in May, 1993 the company has introduced subordinated convertible notes into its capital structure, with current outstandings of A$426 million. Moody's considers these particular instruments to be more akin to debt and, as such, their issuance has not strengthened Amcor's financial profile. Amcor recently announced that it intends to buy back A$100 million of stock. This amount is not significant in Amcor's capital structure, but the willingness to consider reduction of equity suggests that management regard the current level of capital as economic. Moody's expects Amcor to maintain a financial profile consistent with the lowered ratings and, accordingly, the outlook is stable.
Moody's mentioned that Amcor's management has made good progress in re-aligning their businesses within an evolving environment. Amcor has reasonable diversity of revenue both by geography and product, and is vertically integrated in fibre based products. The company has made the necessary hard decisions to rationalise and modernise its operating capabilities, with an emphasis on increasing capacity utilisation. Amcor has become more active in managing its asset portfolio, divesting businesses which are unlikely to achieve target returns on funds employed within an acceptable time-frame. The company has invested sufficiently to allow continuing operations to be in a position to enhance their competitiveness.
Amcor Limited, based in Melbourne, Australia, is an international packaging and paper company, and had sales of approximately US$3.8bn for the year ended 30 june 1998.
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