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Rating Action:

MOODY'S LOWERS AVECIA GROUP PLC's SENIOR NOTES RATING TO Caa3; SENIOR IMPLIED RATING AT Caa1, SENIOR SECURED BANK DEBT RATING AT B3; OUTLOOK NEGATIVE

07 Jan 2004
MOODY'S LOWERS AVECIA GROUP PLC's SENIOR NOTES RATING TO Caa3; SENIOR IMPLIED RATING AT Caa1, SENIOR SECURED BANK DEBT RATING AT B3; OUTLOOK NEGATIVE

Approximately GBP 600 Million of Debt Securities Affected.

London, 07 January 2004 -- Moody's Investors Service today lowered the ratings on Avecia Group Plc ("Avecia") debt securities to Caa3 from Caa1 and Avecia's senior implied rating to Caa1 from B2. At the same time, the rating agency lowered the ratings on the bank debt securities to B3 from B1 and the preferred stock rating to Ca from Caa2. 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 to Caa3 from Caa1

- The senior implied rating for Avecia Group PLC lowered to Caa1 from B2

- The rating assigned to the bank debt facilities for Avecia Investments Ltd lowered to B3 from B1

- The senior unsecured issuer rating for Avecia Group PLC lowered to Caa3 from Caa1

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

Moody's ratings action reflects: i) Avecia's further weakening credit profile with uncertain prospect of immediate recovery given the difficult business environment in the fine chemicals division in Moody's opinion; ii) the uncertainty regarding the group's financing strategy and the increased risk for bondholders partly resulting from uneven cash flows inherent in fine chemicals/biotechnology; iii) the difficulty for the company to meet its obligations to banks and bondholders without reliance on asset disposals or re-negotiation; iv) the limited liquidity available to the group (excluding asset sales) and the reliance on its revolving credit facility subject to financial covenants which are likely to have to be renegotiated in 2004 and v) the very weak performance resulting in very high leverage with a LTM Net debt/EBITDA of 6.7x expected to have further weakened at year-end 2003.

Avecia's overall performance in the first nine months of 2003 has been weak mainly as a result of fine chemicals with an EBITDA generation of GBP 55 million that has to be compared to an interest payment of GBP 44 million and capital expenditure of GBP 39 million, underlying the lack of organic free cash flow generation to adequately service its debt burden. Whilst Moody's understands the group's strategy and focus on fine chemicals and electronic materials, it is concerned that cash flow improvement and a turn around in the fine chemicals division will be heavily reliant upon the success of a few compounds, upon a high occupacity rate at the group's new biotechnology plant in Billingham, an investment that cost Avecia GBP 37 million.

The rating agency further believes that the company's recent asset disposals, at decent multiples, has enabled banks to reduce their exposure whilst leaving bondholders exposed to the uneven cash flow generation of the group. Moody's is concerned that Avecia will be challenged to continue to rely on asset sale in order to comply with its need to reduce its leverage, with the potential for a re-evaluation of the balance sheet structure. To avoid a re-structuring of the balance sheet which could lead to material losses to bondholders, Avecia would need to significantly improve top line revenues, in particular in its fine chemical and electronic material division whilst successfully reducing its cost base, which is the company's plan but which at this juncture in Moody's opinion seems difficult.

Avecia's NeoResins and Specialty Products divisions have shown resilient margins and cashflow generation. However, it is expected that some business units within the latter division will be divested. The sale of the Additives business within this division was announced on December 22, 2003. Moody's also recognises the banks' support, encouraged by their reduced exposure to the group, as demonstrated by their willingness to accept revised financial covenants at year-end 2003. The group should further benefit from the different restructuring programmes put in place in 2003 which are expected to pay-back in a relatively short period of time. Moody's also notes that Avecia is a portfolio of businesses and has flexibility to make disposals as opportunities arise. It is through the peak of its capital expenditure which is expected to reduce significantly in 2004 compared to 2003.

Moody's B3 bank debt rating reflects the relatively low amount of bank debt as a share of total debt and the significant asset coverage and the security package available for the banks. The Caa3 rating on the bonds recognises the possibility that Avecia could default on its notes. It also reflects the fact that the noteholders rank junior to the senior secured creditors and to the other liabilities of the operating companies.

The outlook on all ratings remains negative and reflects Moody's view that in light of the group's weak operating and financial performance, the group may need to re-evaluate its balance sheet over the near term. The outlook also reflects the low liquidity available to the group, the lack of financial flexibility given the high bond interest burden faced by Avecia, an uncertain market outlook for some of the group's businesses and the need to have to re-negotiate its 2004 bank covenants.

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, 2003, LTM sales of GBP 534 million and EBITDA of GBP 78 million. Net debt/(EBITDA) was 6.7x and (EBITDA-Capex)/interest cover was 0.5x.

London
Arnaud Gravier
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

London
Michael West
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

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