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Rating Action:

MOODY'S DOWNGRADES DEBT RATINGS OF DOW CHEMICAL TO A3, AND SHORT TERM RATING TO PRIME-2; UNION CARBIDE DOWNGRADED TO Baa2/PRIME-2; ACTION CONCLUDES REVIEW

09 Apr 2002
MOODY'S DOWNGRADES DEBT RATINGS OF DOW CHEMICAL TO A3, AND SHORT TERM RATING TO PRIME-2; UNION CARBIDE DOWNGRADED TO Baa2/PRIME-2; ACTION CONCLUDES REVIEW

Approximately $9.6 Billion of Debt Securities Affected.

New York, April 09, 2002 -- Moody's Investors Service downgraded the senior debt ratings of the Dow Chemical Company (Dow) to A3 and the short term rating to Prime-2. Moody's also lowered the debt ratings of Union Carbide, a 100%-owned subsidiary; the long term rating to Baa2 and the short term rating to Prime-2. The action concludes the review initiated in January. Issues considered in the review included both companies' depressed financial performance and heightened financial leverage, the limited prospects for an economic recovery in 2002, and the potential for adverse credit implications due to litigation and other event risk factors. The ratings of Union Carbide also consider that Dow does not guarantee its debt, and that it is reliant on Dow for financial liquidity. The ratings take into account the potential for increased exposure to litigation due to asbestos. The outlook for the ratings of Dow is stable. Moody's expects that Dow will focus on debt reduction, reduce the pace of acquisitions, and maintain its solid financial liquidity. The outlook for the ratings of Union Carbide is negative, considering its weak financial performance and the and possibility of adverse litigation developments.

Ratings reduced:

Dow Chemicals

Sr. unsecured notes, bonds, debentures, and industrial revenue bonds: to A3, from A1

Shelf; for Sr Debt: to (P)A3 from (P)A1; for sub debt: to (P)Baa1 from (P)A2; for preferred stock: to (P)Baa2 from (P)A3

Short term rating: to Prime-2 from Prime-1

Union Carbide

Sr. unsecured notes, debentures, industrial revenue bonds: to Baa2 from A2

Short term rating: to Prime-2, from Prime-1

The A3 rating for Dow considers its leading market and technology positions in a diverse portfolio of chemicals and plastics. The performance and agricultural products continue to grow and help offset the cash flow volatility caused by its exposure to commodity chemicals and plastics. Financial metrics remain depressed, owing to higher leverage following several large acquisitions in 2001, and reduced operating performance caused by a combination of high energy prices, the strong dollar, and reduced volumes. Moody's does not anticipate a significant recovery until 2003 at the earliest. While the pace of acquisitions has slowed, lower valuation expectations and Dow's growth strategy present the possibility for future acquisitions. Dow's financial liquidity remains solid, supported in part by $3 billion in committed credit facilities: the facilities do not include material adverse change or litigation clauses on drawdown dates, and, to Moody's knowledge, there are no significant rating triggers within Dow's financial agreements.

The Baa2 rating for Union Carbide considers its leading position in basic commodity chemicals, which are inherently more volatile that Dow's portfolio of businesses. Although a subsidiary of Dow, its debt is not guaranteed. Since completing the acquisition in early 2001, Dow has worked to integrate the operations and capture substantial synergies. The rating differential between the companies considers the size, diversity, financial flexibility, and asbestos exposure of Union Carbide relative to the parent company. Acquisition risk is less of a factor at Union Carbide, as Dow is more likely to minimize future investments at the Carbide level.

The ratings for both companies consider the potential for increased asbestos liabilities, stemming from Union Carbide's past production of asbestos fiber. At year-end 2001, the reserve for asbestos litigation totalled $233 million, against which the company had accrued $223 million in insurance receivables. Although management anticipates that its available insurance will limit the future financial impact on both Union Carbide and Dow, Moody's is concerned that the litigation trends may accelerate as other companies experience financial distress, and that the insurance ultimately may not provide adequate protection.

Headquartered in Midland, Michigan, Dow Chemical is a diversified chemicals producer. Revenues in 2001 totalled $28 billion. Union Carbide, headquartered in Danbury, Connecticut, is a wholly-owned subsidiary of Dow. Union Carbide's 2001 revenues totaled $5.4 billion.

New York
Richard Stephan
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
David Neuhaus
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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