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Rating Action:

MOODY'S LOWERS AVECIA GROUP PLC's SENIOR NOTES RATING TO Caa1; SENIOR IMPLIED RATING AT B2, SENIOR SECURED RATING AT B1; OUTLOOK NEGATIVE

17 Dec 2002
MOODY'S LOWERS AVECIA GROUP PLC's SENIOR NOTES RATING TO Caa1; SENIOR IMPLIED RATING AT B2, SENIOR SECURED RATING AT B1; OUTLOOK NEGATIVE

Approximately GBP 600 Million of Debt Securities Affected

Frankfurt, December 17, 2002 -- Moody's Investors Service today lowered the ratings on Avecia Group Plc ("Avecia") debt securities from B3 to Caa1 and Avecia's senior implied rating from B1 to B2. At the same time, the rating agency lowered the ratings on the bank debt securities from Ba3 to B1 and the preferred stock rating from Caa1 to Caa2. These actions conclude a rating review initiated on November 11, 2002. The outlook on all ratings is negative. Ratings affected include:

- The rating for the US$ 540 million in senior notes of Avecia Group PLC lowered from B3 to Caa1

- The senior implied rating for Avecia Group PLC lowered from B1 to B2

- The rating assigned to the bank debt facilities for Avecia Investments Ltd lowered from Ba3 to B1

- The senior unsecured issuer rating for Avecia Group PLC lowered from B3 to Caa1

- The preferred stock rating on the US$45m PIK Preference shares for Avecia Group PLC lowered from Caa1 to Caa2

The ratings downgrade reflects Moody's concerns about the weak cash flow generation of Avecia relative to its debt level and Moody's expectations that Avecia's credit metrics will further deteriorate in the coming twelve months as a result of elevated CAPEX, limited operating cash flow generation and charges arisising from restructuring. The group's leverage ratio was 9.3x on a Net Debt/(EBITDA-CAPEX) basis for the last twelve months ending September 30, 2002. The rating agency anticipates that debt/cashflow leverage and interest coverage metrics are likely to remain under pressure in 2003 due to an expected weak economic environment generally, the loss of business and cash flows resulting from the US launch delay of a principal customer's drug, and due to the restructuring cash charges we understand the Group will take in 2003. Moody's also notes that the group's CAPEX spend will be significant given the remaining investments they have to make in their biotechnology plant in Billingham.

In Moody's opinion, the fine chemicals industry currently faces excess capacities, increased customer concentration and reduced product pipeline from the pharmaceuticals industry which have translated (and are expected to continue to translate at least over the next 12-18 months) into lower growth rates and margins. Moody's is concerned about the continuous erosion of Avecia's EBITDA margins (from 20% in 2000 to 16% in 2001 and 9% in the first 9 months of 2002). In addition, the electronics materials division, though expected generally to be higher-growth, has shown disappointing cashflow generation in 2002 and remains part of an industry with uncertain visibility and volatile demand where innovation is key, thus requiring significant R&D and CAPEX. In fine chemicals and electronics materials, Avecia has made substantial investments, such as in Covion or in biotechnology, which are not expected to materialise into significant cash flows before the end of 2003, leaving we believe Avecia with a challenging year ahead of them.

Moody's, however, recognises Avecia's adequate liquidity and the measures the group has taken to reduce its cost base in order to counter the lower demand it will face in fine chemicals. The company had available liquidity (mainly provided by way of a GBP 100m revolving credit facility which is constrained by financial covenants where headroom will be reduced in 2003) of GBP 85m as of September 30, 2002 which is, however, expected to be reduced going forward given the negative free cash flow generation expectations that Moody's has for 2003 and compulsory debt amortisation payments of GBP24m in 2003. Moody's also anticipates that the voluntary severance programme recently launched will bear fruits in 2003/2004. The rating agency furthermore acknowledges the good performance of Avecia's other two divisions NeoResins and Specialty Products which have shown resilient margins and good cashflow generation with limited investments over the last couple of years.

Moody's B1 bank debt rating reflects the relatively low amount of bank debt as a share of total debt (42%) and the significant asset coverage and the security package available for the banks. The Caa1 rating on the bonds reflects the structural subordination of the notes to the senior secured creditors and to the other liabilities of the operating companies.

The outlook on all ratings is negative and reflects a challenging market outlook for some of the group's businesses, the tight headroom under the bank covenants and a more modest liquidity cushion for 2003 that could be reduced further should the fine chemicals or electronics divisions experience another difficult year. Any stabilisation of Avecia's debt protection measures from expected year-end 2002 levels and reasonable levels of covenants headroom under the bank facilities and liquidity could lead Moody's to consider changing the outlook on the ratings from negative to stable.

Avecia Group PLC is domiciled in Manchester, United Kingdom, and is a holding company for a diversified specialty chemicals group generating, as of September 30, 2002, LTM sales of GBP 587 million (excluding Stahl's division) and operating profit of GBP 26 million. Net debt/(EBITDA-CAPEX) was 9.3x and (EBITDA-Capex)/interest cover was 1.1x.

London
Donald Burri
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
44 20 7772 5454

Frankfurt
Dr. Juergen Berblinger
Managing Director
Corporate Finance Group
Moody's Deutschland GmbH
+49 69 707 30 700

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