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27 Aug 1999
MOODY'S DOWNGRADES HOECHST CORP AND HNA HOLDINGS INC; SENIOR UNSECUREDTO Baa2
Moody's Investors Service downgraded the long term ratings at Hoechst Corp and HNA Holdings to Baa2 from A2. The short term guaranteed rating of HNA Holdings Inc is downgraded to Prime-2, and the short term guaranteed rating of Hoechst Corp is confirmed at Prime-1. These actions anticipate the demerger of Hoeschst A.G.'s industrial chemical operations, which include Hoechst Corporation, its subsidiary HNA, and Ticona, all grouped under a new holding company, Celanese A.G. The demerger has received the necessary regulatory clearances and shareholder approvals and is scheduled for the fourth quarter, 1999. In addition, Moody's said it assigned a Baa2 to Celanese's syndicated bank facility, which will rank pari passu to other senior unsecured debt and will include financial covenants and material adverse change clauses.
A summary of ratings changes is as follows:
HNA Holdings, Inc. - (to be renamed Celanese NA Holdings Inc at demerger)
Short term rating for commercial paper: downgraded to Prime-2, and rating withdrawn due to expected program cancellation at demerger.
Issuer rating and long term ratings on notes, MTNs, pollution control and industrial revenue bonds; downgraded to Baa2 from A2.
Hoechst Corporation -- (to be renamed Celanese Americas Corp.)
Short term rating for guaranteed commercial paper: confirmed at Prime-1 based on the guarantee from Hoechst A.G. that will stay in place until the demerger. At demerger, a new commercial paper program is expected to be put in place, with an expected rating of Prime-2, based on a guarantee from Celanese A.G.
Marion Merrell Dow Inc. ASOP Trust
Guaranteed ASOP Notes - Senior unsecured downgraded to Baa2
Ratings remaining on review, outlook uncertain: Hoechst Corporation - Eurobonds due 2000 at A2. The obligor on these bonds has been changed from Hoechst Corporation to Hoechst Marion Roussel Inc. ("HMR"), the credit strength of which Moody's is currently reviewing.
Moody's said the downgrades reflect substantial changes to the credit profile, the most significant of which is the separation of the rated entities from a larger and financially stronger enterprise. Additional negative factors related to the demerger include a moderate step up in financial leverage targets, modifications to the business portfolio, and a moderate degree of event risk in light of a concentration of Celanese ownership with one shareholder. Lastly, the credit profile is adversely affected by profit declines in certain product areas resulting from more competitive industry conditions.
The Baa2/ Prime-2 ratings at Celanese AG and its North American-based subsidiaries are supported by leading market shares in a large part of the business portfolio, broad end-market diversification and leading product and process technology in certain core areas of the portfolio. About three-quarters of Celanese's roughly ¬5.2 billion in sales are from products positioned first or second in terms of global market share.
The ratings are also supported by adequate financial policies and ambitious divestiture objectives in the near term that could potentially enhance balance-sheet flexibility. Moody's expects leverage to be managed in the 30-40% range in the medium and longer term. Debt-financed acquisitions significantly above this level are not anticipated without utilizing equity financing.
The primary weaknesses in the credit include a high degree of earnings cyclicality due to the heavy commodity content of the portfolio, and the current weak operating performance, which is caused, in part, by the cyclical trough in the company's core commodity products and, in part, by increased industry competitiveness.
Moody's estimates that on a normalized, run-rate basis, 1999 EBITDA-to-interest is expected to range between 3.5 to 4.5 times, while pro forma year-end debt is estimated between ¬1.1 and ¬1.4 billion. These outcomes hinge largely on the timing of targeted asset sales and receipt of cash proceeds.
The company's primary commodity products - acetic acid, VAM, acrylic acid and oxo chemicals - have recently faced severe trough conditions, aggravated further by rising feedstock costs. Recent price increases have been announced, but it is not clear to what extent higher prices might be realized and offset higher raw material costs in the second half of this year. The medium term cyclical outlook is also challenging as new industry capacity next year could limit recovery in these commodities. In addition, the company's acetate tow and filament businesses have performed poorly and face heightened competition from Asian producers. Customers in the acetate filament business are increasingly Asian-based, Moody's added.
Despite these weaknesses and challenges, Moody's believes the newly independent management team at Celanese AG has opportunities to improve margins and strengthen the portfolio through restructuring and by culling underperforming and non-core business units. It is expected that divestiture proceeds would be used to reduce debt, although the timing of divestitures is uncertain, according to Moody's. Moreover, ongoing restructuring activities and the completion of new production capacity that might eventually replace older, less efficient capacity are expected to contribute to volume growth and provide some relief to margin pressure in the medium term.
Event risk in the credit has two key sources. One shareholder - Kuwait Petroleum Corporation - will own about 25% of Celanese's outstanding shares at demerger. Changes in this shareholder's long term ownership intentions could pressure management to buyback shares. Secondly, management's is likely to seek acquisitions longer term.
The outlook on the Baa2 ratings is positive. A meaningful improvement in margins and debt protection measures, resulting from a combination of cyclical recovery, debt reduction with proceeds from asset sales, restructuring benefits and changes in the business mix, would lend support to higher long-term ratings.
Headquartered in Frankfurt, Germany, on a pro forma basis, Celanese AG is a ¬5.2 billion diversified industrial chemical company with leading market positions in acetic acid, vinyl acetate monomer, acetate tow, acrylates, polyacetals, liquid crystal polymers, oriented polypropylene films, artificial sweeteners and sorbates.
No Related Data.
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