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Rating Action:

MOODY'S DOWNGRADES RATINGS ON ASHLAND'S DEBT TO Ba1; ASSIGNS Ba1 CORPORATE FAMILY RATING; OUTLOOK STABLE

29 Jun 2005
MOODY'S DOWNGRADES RATINGS ON ASHLAND'S DEBT TO Ba1; ASSIGNS Ba1 CORPORATE FAMILY RATING; OUTLOOK STABLE

Approximately $300 Million of Rated Securities Affected

New York, June 29, 2005 -- Moody's Investors Service downgraded the senior unsecured debt of Ashland Inc. to Ba1 following Ashland's shareholder approval of the sale of its 38% equity interest in Marathon Ashland Petroleum LLC (MAP) to Marathon Oil Corporation (Marathon). Moody's also downgraded Ashland's issuer rating to Ba1 from Baa2, lowered the company's rating for CP to Not-Prime from Prime-3, and assigned a corporate family rating of Ba1. Ashland will likely repay roughly $1 billion of its rated debt with the proceeds of from the MAP transaction. Moody's also lowered the ratings on tax exempt pollution control revenue bonds that are supported by Ashland to Ba1. The outlook for Ashland is stable.

Ashland Inc.

Ratings assigned:

Corporate family rating -- Ba1

Ratings downgraded:

Issuer rating to Ba1 from Baa2

Senior unsecured notes and debentures to Ba1 from Baa2

Rating for commercial paper to Not-Prime from Prime-3

Pollution control revenue bonds supported by Ashland to Ba1 from Baa2

Shelf registration for senior unsecured debt to (P)Ba1 from (P)Baa2; subordinated debt to (P)Ba2 from (P)Baa3; preferred stock to (P)Ba3 from (P)Ba1

Ashland's Ba1 corporate family rating reflects the size of the company's large cash balance (estimated at $1 billion subsequent to this transaction), the company's substantial size with roughly $9 billion in sales, the significant diversity in its businesses, and the moderate improvement to financial performance since fiscal 2003. The ratings are tempered by weak operating margins, Moody's belief that the company will remain free cash flow negative in 2005, and the willingness of management to re-lever the balance sheet over time to a targeted 30% debt to capital or 2-3 times debt to EBITDA level.

The stable outlook reflects Moody's expectation that free cash flow will be negative by less than $200 million in 2005, excluding the impact of the MAP transaction and related extraordinary items, and that operating performance will improve significantly (operating margins will rise above 4%) in fiscal 2006 enabling positive free cash flow generation. The ratings could be lowered if free cash flow is negative by more than $100 million in 2006, or there is a significant reduction in the company's cash balance due to an acquisition or other event. There would be positive pressure on the ratings if operating margins rise meaningfully above 5%, and the company is able to demonstrate sustainable free cash flow generation of $100-150 million per year.

Over the past two years, Ashland has been working to improve the performance of its wholly-owned businesses. The profitability of its Distribution and Specialty Chemical segments has increased significantly, but they remain below industry medians for this point in the cycle, in Moody's opinion. Additionally, improving the profitability of the paving and construction business has been an ongoing challenge due to adverse weather conditions and elevated fuel, concrete and asphalt costs. Finally, Valvoline has continued to be a solid contributor to earnings, but the high level of Ashland's corporate expenses offsets the earnings from this business. On a consolidated LTM basis, the company's operating margins are roughly 2% and have been below 3.5% for the past three years. Moreover, the company's cumulative free cash flow over the past three calendar years, excluding the after-tax value of MAP dividends and certain one-time items, has been negative by over $400 million. Year-to-date free cash flow as of March 31, 2005 remains negative by an additional $400 million but has been negatively impacted by the seasonal working capital build, expenses related to the MAP divestiture, the repurchase of assets coming off lease.

Ashland is expected to complete the sale of their 38% minority interest in MAP (MAP) and two other businesses (the maleic anhydride business and 61 Valvoline Instant Oil Change centers) to Marathon on June 30, 2005. The company should receive $2.8 billion in cash and accounts receivables, and Ashland's shareholders will receive $915 million in Marathon common stock. In addition upon closing, Ashland would receive its share of deferred distributions from MAP, estimated at $350-425 million; this excludes the $267 million already received by Ashland in May 2005. The revised transaction will result in some Section 355(e) taxes liability; however, Marathon has agreed to pay the initial $200 million of taxes. It is unlikely that Ashland will be required to pay any taxes since its share price has remained below $74.50 per share.

Ashland Inc., headquartered in Covington, Kentucky, owns a 38% equity interest in Marathon Ashland Petroleum. Ashland through its four wholly-owned businesses is a leading North American distributor of chemicals and plastics; one of the largest transportation construction contractors in the United States; a global supplier of specialty chemicals; and a leading marketer, distributor and producer of branded automotive and industrial products and services. Ashland reported sales of $8.8 billion on an LTM basis ended March 31, 2005.

New York
John Rogers
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexandra S. Parker
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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