MOODY'S DOWNGRADES RATINGS OF ASHLAND INC. (SR. UNSECURED TO Baa2); COMMERCIAL PAPER CONFIRMED AT PRIME-2
New York, 02-03-97 -- Moody's Investors Service downgraded Ashland Inc.'s senior long-term debt ratings to Baa2 from Baa1, and its rating for preferred stock to "baa3" from "baa2", concluding a rating review announced on December 11, 1996. Ashland Inc.'s rating for commercial paper is confirmed at Prime-2. The rating action is based on uncertainties over the company's ability to materially improve its financial leverage and capital returns, despite a number of announced restructuring initiatives.
Ashland has announced restructuring plans designed to improve the competitive position of its core assets and to free up cash flow for reinvestment. The planned merger of Ashland Coal Company and Arch Mineral will leave Ashland with an approximate 53% controlling interest in the new larger entity. Ashland will have opportunities in merging the two companies to effect operating efficiencies and some overhead reductions, but this process could take several years and the newly merged entity will also increase Ashland's consolidated balance sheet debt. While these obligations are legally non-recourse to Ashland, Moody's views the coal company debt as part of Ashland's financial leverage and debt service, particularly in light of Ashland's majority ownership and coal's status as a core asset.
Ashland has also confirmed plans whereby its wholly owned subsidiary, Ashland Exploration Inc., will be divested in two steps through an initial public offering and subsequent tax free spin off to Ashland's shareholders. This transaction, if completed as planned in the near term, will generate cash for potential debt reduction and will disengage Ashland from exploration and development commitments that would have required substantial spending in the near to medium term. It will also reduce the diversification benefit provided by Ashland's portfolio of non-refining assets, and the earnings and cash flow growth that might have occurred in a less capital-constrained environment.
Taken together, the coal and exploration and production transactions will not materially reduce Ashland's financial leverage, either on a total debt basis or in terms of its book equity. In the near term, the company's leverage will improve if its preferred stock is converted to common stock, which would boost equity and slightly reduce its total dividend outflows. However, Ashland's leverage remains elevated, particularly if off balance sheet obligations such as operating leases are factored in. Moreover, pressure to improve capital returns, coupled with management's strategy to build up its non-refining businesses, indicate that further substantive debt reduction will not take place, absent major restructuring in the medium term. Shareholder enhancements such as a major common stock repurchase program do not appear to be a risk factor, based on management's preference for capital reinvestment and the negative leveraging that would result.
Ashland's central challenge will be to find ways to boost its capital returns in the face of difficult competitive conditions in refining and marketing. Despite some indications in Ashland's key PADD II markets that capacity may rationalize and improve competitive conditions over the next few years, it is still not clear when this will happen, or even whether refinery closures can offset other capacity increases and potential product movements into these markets. Consequently, Ashland's efforts will necessarily entail cost reductions, refinery capital spending at maintenance levels, and possibly the restructuring of its refining and marketing operations. The latter could take a number of forms, including capacity reductions, alliances or partnerships with crude suppliers or refiners, and other moves to reduce capital employed. However, the timing and impact on operating earnings remain unclear, with uncertain outcomes for Ashland's debt, capital structure and asset mix.
Moody's Baa2 rating of Ashland's long-term debt and its Prime-2 rating for commercial paper also reflect the continued return and cash flow support provided by the company's investments in non-refining businesses, including chemicals and road construction. The rating outlook is stable, but Ashland could achieve a higher debt rating if restructuring efforts translate into higher capital returns and substantive leverage reductions.
Ratings affected include Ashland's debentures, medium term notes, counterparty rating and industrial revenue bonds, downgraded to Baa2; its convertible subordinated debentures, downgraded to Baa3; and its convertible preferred stock, lowered to "baa3". Ashland's Prime-2 rating for commercial paper is confirmed.
Ashland Inc. is headquartered in Ashland, Kentucky. It is a leading independent refiner/marketer with other significant operations in chemicals, convenience stores, motor oil, exploration and production, and road paving.
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