MOODY'S LOWERS ENGLISH CHINA CLAYS' SHORT-TERM DEBT RATING TO P-2, AND ENGLISH CHINA CLAYS DELAWARE'S SR. RATING TO A3
London, 01-15-97 -- Moody's Investors Service downgraded the short-term rating for commercial paper of English China Clays Plc (ECC) to Prime-2 from Prime-1. Moody's also lowered the rating of the guaranteed 7.375% notes of ECC's subsidiary, English China Clays Delaware Inc., to A3 from A2. The downgrades reflect Moody's expectation that ECC's narrowed focus on paper minerals and speciality chemicals will continue to leave it highly vulnerable to the volatile paper cycle at the same time as it endeavours to turn around its underperforming speciality chemicals business. The rating actions end a review for possible downgrade that was initiated on October 29, 1996.
The rating agency said that the continuing substitution of calcium carbonates for kaolin, increased competition from Amazonian clays, and slower growth in overall paper demand will limit ECC's topline growth and keep up margin pressure in the intermediate term. ECC's weak operating performance in 1996, with half year operating profits (pre operating exceptionals) down to œ30.2 from œ55.8 million in the wake of massive de-stocking in the paper industry indicate the extent to which it is now exposed to the paper cycle. Although current year trading should show some cyclical recovery, ECC will continue to face structural problems. In particular, demand for kaolin, the company's main paper mineral product, will see little growth as the process of substituting calcium carbonates for kaolin in paper production continues. Although ECC has a market presence in calcium carbonates, it faces strong competitive pressures in that market, especially in Europe. Moreover, margins in carbonates are significantly lower than in kaolin. Additionally, new kaolin production coming on stream in Brazil will increase supply in some kaolin qualities, particularly in North America--and thus undermine prices.
Considerable management attention has been devoted to the restructuring and refocussing of Calgon, the specialty chemicals business. But ECC still faces an uphill battle in trying to achieve margins closer to industry averages and with that meaningful earnings diversification, given Calgon's difficult market position in its core water treatment activities. The eventual divestiture of Calgon's non-paper business remains a possibility.
Moody's noted that despite the deterioration of ECC's debt position in 1996, the company continues to be conservatively financed. The ratings also recognize the potential benefits of ECC's wide-ranging review process, which is being aided by outside consultants and should yield a more focused strategy. Further restructuring and cost cutting efforts--which will mean additional up-front charges--should go some way to defend the company's market position in its core kaolin-to-paper business.
Failure to achieve a more efficient operating structure could have negative rating implications.
English China Clays, a world-wide operating producer of paper minerals and specialty chemicals, is the world's largest kaolin producer. It is based in Reading, England. English China Clays Delaware Inc. is its wholly owned subsidiary.
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