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Rating Action:

MOODY’S DOWNGRADES DYCKERHOFF’S LONG-TERM SENIOR DEBT AND ISSUER RATINGS TO Ba1 FROM Baa3 AND SHORT-TERM DEBT RATING TO NOT PRIME

19 Dec 2002
MOODY’S DOWNGRADES DYCKERHOFF’S LONG-TERM SENIOR DEBT AND ISSUER RATINGS TO Ba1 FROM Baa3 AND SHORT-TERM DEBT RATING TO NOT PRIME Moody’s Investors Service today downgraded Dyckerhoff AG’s senior long-term debt and issuer ratings to Ba1 from Baa3 and its short-term debt rating to Not Prime from Prime-3. The senior debt issued by Lonestar Inc., guaranteed by Dyckerhoff AG, has also been downgraded to Ba1. Moody’s also assigned a senior implied rating of Ba1 to Dyckerhoff AG. The outlook on all ratings is negative.



The downgrades, which conclude the rating review process initiated on 26 August 2002, are primarily based on Dyckerhoff's weakened financial profile and its reduced financial flexibility resulting from a depressed cash flow due to the group's large exposure to the troubled German market, which is delaying debt reduction. Moody’s also considered the recent announcement that Buzzi Unicem and the Dyckerhoff family have entered into an agreement that significantly modifies Dyckerhoff AG’s shareholder structure and adds an element of strength to the company’s bondholders.



The weakened financial profile reflects the company’s worsening operating performance amidst a continuously depressed environment in its key market of Germany as well as its reduced ability to balance fluctuations in performance among its operations, due to a less geographically diversified business franchise than those of its peers, Moody’s said. The proposed restructuring measures and the EUR95 million cartel fine, which will be accounted for in fiscal 2002, also weigh negatively on the financial profile.



The cyclical downturn in the German cement business (which accounts for about 40% of group sales) is due to a protracted slump in commercial and residential construction in Germany. The downturn is exacerbated by a fierce price competition for ready mixed concrete and a general over-capacity in Germany, which Moody’s expects should trigger industry consolidation in the near to medium term, but which has failed to yield any results so far. Internationally, construction investments - especially in commercial construction - in the US, the Benelux countries and Poland are also contracting, reducing Dyckerhoff’s ability to offset negative domestic price and volume trends. The rating agency believes the imbalances in the cement and construction markets will eventually be resolved but probably not in the near future.



The disparity between the performance of the international operations (especially in the US) and the domestic operations has also had a mixed effect on the outstanding bonds. Since the most of the group’s cash flow is currently being generated in the US, the dollar-denominated bonds issued by the US operating entity Lone Star Industries Inc. and guaranteed by Dyckerhoff AG (US$350 million and US$150 million) are structurally preferred over the euro bonds issued by Dyckerhoff AG itself (EUR300 million).



In order to eliminate the structural preference of part of the group’s debt, Dyckerhoff’s management arranged for a US$ 600 million up-stream guarantee to be issued by Lone Star Industries Inc.. On the basis of this guarantee, which will support the EUR300 million bond issued by Dyckerhoff AG and its remaining financial debt, Moody’s has assigned its Ba1 rating to said Eurobond and to the Issuer rating.



The group recently settled an antitrust investigation related to an alleged price and volume fixing collusion by consenting to co-operate with the German authorities. The settlement payment of EUR95 million is likely to be a further driver towards consolidation in the domestic industry. The amount will be payable in several instalments. However, Moody’s views that the fine will reduce Dyckerhoff’s financial flexibility in terms of cash outflows and charges to equity in the future, despite the favourable payment terms.



In response to the persistent economic pressure, Dyckerhoff has started a cost reduction initiative comprising overhead cost-savings, labour force reductions and cuts in capital expenditure. While a significant portion of potential cost-savings has already been identified and addressed, Moody’s believes that execution may prove challenging but that overall the counter-measures will eventually result in sustainable cost-savings, albeit weighing negatively on the company’s earnings in 2002. However, total targeted savings are unlikely to come into effect in the near term.



On the positive side, Moody’s took into consideration the recent announcement that the Dyckerhoff family will sell 34.0% of the voting capital of Dyckerhoff AG, equal to virtually their total ownership, to Italian cement producer Buzzi Unicem SpA and IMI Investments SpA. The sale occurs in advance of the December 2004 deadline for the put option previously granted by Buzzi Unicem to the Dyckerhoff family.



Buzzi Unicem now effectively owns a further 9.7% of the Dyckerhoff family’s voting capital at a total cost of EUR144 million while IMI Investments SpA, a Banca IMI subsidiary, will acquire the remaining 24.2% of the voting stock. Moody’s understands that, for the latter shares, in lieu of the put option previously granted to the Dyckerhoff family, Buzzi Unicem is granting IMI Investments a put option to be exercised at any time until December 2004, with share transfer and payment in January 2005. If this option is fully exercised, the total cost to Buzzi Unicem will be EUR418.5 million, giving it 68% of the ordinary capital.



Moody’s acknowledges that this transaction brings the two groups closer to the goal of eventually creating a combined/integrated cement operation. A pro-forma consolidation of Buzzi Unicem and Dyckerhoff suggests that the combined entity would have a diversified geographic presence, a capital structure that is only moderately leveraged and an implied debt capacity notably stronger than the current fundamentals of Dyckerhoff alone. Moody’s Ba1 senior implied rating takes this into consideration but also recognises the lengthy time horizon for a complete consolidation and integration (i.e. after December 2004). An acceleration of this process, however, carries some eventual potential for upward rating pressure.



Moody’s also recognises the cash flow-generative nature of Dyckerhoff’s well-established business and management’s commitment to debt consolidation as expressed by the continuing cost-cutting efforts and business re-organisation. As a result, the company’s liquidity position remains appropriate, considering its positive operating cash flow, alternative sources of cash as well as further asset disposals. The rating also considers the continuing support of the Dyckerhoff family, even after the sale of their 34% ownership, as demonstrated by the announcement of a EUR200 million cash injection in the form of a 10-year subordinated loan, which will be fully applied to the reduction of senior debt. In addition, Dyckerhoff has committed credit lines to cover its short-term funding needs. The maturity profile does not show any large-scale maturities in the short term.



The negative rating outlook reflects the challenges presented by the complexities of the market disruptions and the still developing nature of the Buzzi/Dyckerhoff integration. Firstly, the current over-capacity for cement in Dyckerhoff’s domestic market requires rigorous capacity adjustments to preserve margins and ensure competitiveness of participants in the mid- to long-term. Secondly, the cartel office ruling may have a significant bearing on volumes and prices going forward, potentially extending the ongoing pressure on prices. Finally, the nature of the Buzzi/Dyckerhoff alignment is still dynamic: while it seems compelling on economic grounds, the concept needs to be perfected legally for it to effectively support Dyckerhoff bondholders. Until the two units are fully integrated operationally and financially, uncertainty in this context remains.



The following ratings have been downgraded:

- Dyckerhoff AG: Issuer Rating – to Ba1 (from Baa3)

- Dyckerhoff AG: Senior unsecured debt to - Ba1 (from Baa3)

- Lone Star Industries Inc.: Senior unsecured debt – to Ba1 (from Baa3)

- Dyckerhoff AG: Short-term debt – to Not Prime (from Prime-3)



The following rating has been assigned:

- Dyckerhoff AG: Senior Implied - Ba1 (new)



The Dyckerhoff Group has a cement production capacity of 25 million tons, with operations in eight countries. For 2002, turnover is expected to be around EUR1.5 billion.



The Buzzi Unicem Group is the second largest cement producer in Italy, with substantial operations also in the USA and Mexico, a total capacity of 15 million tons and an estimated 2002 turnover in the range of EUR1.5 billion.






No Related Data.
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