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05 Sep 2003
MOODY'S DOWNGRADES UNION CARBIDE'S SR. UNSECURED DEBT TO B1; OUTLOOK NEGATIVE
Approximately $ 1.3 Billion of Debt Securities Affected.
New York, September 05, 2003 -- Moody's Investors Service has downgraded the senior unsecured debt
of Union Carbide Corporation (Carbide) to B1; Carbide's rating
outlook is negative. Moody's also affirmed the A3 rating
on The Dow Chemical Company, and reiterated the company's
negative rating outlook.
The downgraded reflects the absence of a guarantee from its parent company
The Dow Chemical Company (Dow), uncertainty over the financial impact
of asbestos related liabilities, lack of access to credit from any
independent source, and the substantial reduction in Carbide's
operating assets. The B1 ratings incorporate limited support from
Dow, a better and more diversified product portfolio than most olefin
producers, the improving fundamental in several downstream ethylene
derivative markets, and the anticipation of increased dividends
from its Equate and Optimal joint ventures. These ventures have
access to low cost feedstocks and Optimal is well placed to take advantage
of the tightening supply/demand balance for ethylene glycol in Asia.
The negative outlook reflects limited visibility with regard to the company
asbestos liabilities and the concern that lawsuits and settlement payments
could significantly increase over the next few years. In addition,
it reflects uncertainty over Dow's willingness to continue to support
Carbide, if these liabilities increase significantly or if insurance
reimbursements fail to materialize.
Moody's believes that the size of Carbide's asbestos liability
relative to its operating assets is a significant concern. While
these liabilities are largely offset by a large insurance receivable,
the lack of detailed information on the nature and terms of the insurance
reimbursements raises uncertainty over the timing of cash receipts from
insurance relative to settlement payments. Carbide hired a well
known firm to generate an estimate of its future asbestos-related
liabilities. However, Moody's believes that the lack
of detail on trends in new cases, pending cases, and settlement
costs per claim increases the uncertainty over the size and timing of
payments related to future asbestos settlements. Although,
Carbide has increased the disclosure on its asbestos-related balance
sheet accounts, Moody's has limited information on which to
estimate future trends.
The B1 rating reflects Moody's belief that Dow will continue to
support Carbide unless it is overwhelmed by the combination of rising
settlement costs and the exhaustion of insurance coverage, or the
inability to obtain insurance reimbursements. At the end of the
second quarter, Carbide's potential insurance coverage was
roughly $1.47 billion. Additionally, Carbide's
non-current asbestos-related liabilities account declined
by roughly $160 million, an indication that settlement activity
was elevated in the first half. Likewise, its total insurance
receivable declined by roughly $95 million, indicating that
Carbide is receiving reimbursements from its insurers.
Carbide's new litigation strategy, which was implemented last
year, involves litigating its asbestos claims unless it makes strategic
or economic sense to settle. Moody's believes that this strategy
will slow the outflow of cash and ultimately result in lower settlement
costs over the intermediate-term. In 2002, Carbide
was the only company to go to trial in the state-wide mass asbestos
litigation in West Virginia. Although Carbide was found liable,
the timeframe for Carbide's product liability was significantly
narrower than anticipated. Moody's believes that the outcome
of this trial facilitated Carbide's settlement of a similar state-wide
asbestos litigation in Virginia. Carbide's insurance is covering
the majority of its asbestos litigation costs.
Carbide's liquidity is provided by a one year $1 billion
secured credit facility provided by Dow. In addition to the facility's
short tenure, Dow has the ability to demand repayment upon 30 days
written notice. At the end of the second quarter, there was
over $300 million outstanding under this facility. Moody's
believes that the terms of this facility are more restrictive than most
third party committed facilities; however Moody's is uncertain as
to Carbide's ability to obtain sufficient financing from an independent
Since the acquisition of Carbide by Dow in 2001, Carbide's
operating asset base has been significantly reduced and Carbide is much
more reliant on Dow for its financial performance. Carbide has
exchanged most of its international operating assets, including
the recently completed Joffre Canada plant, in exchange for minority
equity stakes in Dow's respective international subsidiaries.
While these exchanges facilitated the operational synergies between Dow
and Carbide, Moody's believes that the minority equity ownership
materially limits Carbide's control over cash flows generated by
these assets and Carbide's ability to leverage these assets. In
addition, Carbide is in the process of shutting down approximately
50% of its US ethylene capacity. While Carbide and Dow believe
that they can source ethylene at a lower overall cost due to the age of
these facilities and their reliance on gas feedstocks, Moody's
believes that this action will further increase the company's intermediate-term
reliance on Dow for its production economics. Furthermore,
due to the consolidation of Carbide's and Dow's US sales and
marketing operations, Dow has become Carbide's primary customer
accounting for 90-95% of sales.
The integration of Dow's and Carbide's operations has generated significant
synergies for the combined companies, but greatly increased Carbide's
reliance on Dow for its liquidity and financial performance. Moody's
believes that the combination of the uncertainty over Carbide's potential
asbestos-related liability, Carbide's critical reliance on
Dow for liquidity, and Moody's concern that Dow may not support
Carbide under adverse circumstances greatly impair Carbide's credit profile
Moody's believes that Carbide's asbestos liabilities and the
availability of insurance reimbursements will drive future rating actions.
If either current asbestos-related liabilities or current asbestos-related
insurance receivables increase by several hundred million in any one quarter
or as non-current asbestos related insurance receivables fall below
$700-800 million, Moody's could take additional
negative rating actions. Conversely, if federal legislation
is passed that would greatly reduce uncertainty over Carbide's ultimate
asbestos-related liability, Moody's could reassess
the appropriateness of the B1 senior unsecured ratings.
Moody's affirmed the A3 senior unsecured rating of Dow and reiterated
its negative outlook. Although Dow's second quarter financial
performance improved significantly and Moody's anticipates that
the company will be able to generate $700-800 million in
free cash flow in 2003. Moody's remains concerned that the
industry fundamentals remain weak, especially in the ethylene chain,
and that financial expectations for 2004 and 2005 may have to be lowered.
If Moody's believes that Dow may not be able to significantly reduce debt
over the next 12-24 months, Moody's could reassess
the appropriateness of it's A3 ratings.
Union Carbide Corporation -- senior unsecured debt to B1 from Baa2
Headquartered in Midland, Michigan, The Dow Chemical Company
is a diversified chemicals and plastics producer that generated over $27
billion of revenues in 2002. Union Carbide, headquartered
in Danbury, Connecticut, is a wholly-owned subsidiary
of Dow. Union Carbide's 2002 revenues totaled $4.8
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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