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Rating Action:

MOODY'S LOWERS RATINGS OF BORDEN CHEMICAL, INC.'S SENIOR NOTES AND SENIOR CREDIT FACILITY TO B1 FROM Ba3; RATING OUTLOOK IS NEGATIVE

01 May 2002
MOODY'S LOWERS RATINGS OF BORDEN CHEMICAL, INC.'S SENIOR NOTES AND SENIOR CREDIT FACILITY TO B1 FROM Ba3; RATING OUTLOOK IS NEGATIVE

Approximately $750 Million of Debt Securities Affected.

New York, May 01, 2002 -- Moody's lowered the ratings of Borden Chemical, Inc., and removed the ratings from review for downgrade. The rating outlook is negative.

Ratings affected:

$250 million revolving credit facility, maturing 2002, to B1 from Ba3

$117 million debentures, due 2021, to B1 from Ba3

$250 million notes, due 2023, to B1 from Ba3

$ 78 million sinking fund debenture, due 2016, to B1 from Ba3

$ 49 million sinking fund debenture, due 2019, to B1 from Ba3

$ 8 million industrial revenue bonds, due 2012, to B1 from Ba3

$2 billion shelf, senior debt securities, multiple seniority to (P)B1 from (P)Ba3, to (P)B3 from (P)B2, and to (P)Caa1 from (P)B3

Senior Implied, to B1 from Ba3

Issuer Rating, to B2 from Ba3

The rating action reflects the company's weaker operating margins and creditor protection measurements over the past two years, losses, and the uncertain timing of an improvement in the cyclical housing and automotive end markets for its resin products that are affected by the slowing of the economy. The downgrade and negative rating outlook also reflects concerns about potential future common dividends and distributions in the intermediate term, given the high level of the company's prior dividends and distributions from operating cash flow or sale of assets, and the minimal protection afforded to bondholders by the bond indentures. The ratings assume that the company will not pay dividends in 2002 and will pay off most of its affiliated debt during 2002. The ratings continue to reflect high leverage, negative book equity, modest interest coverage, and the fact that a significant portion but not all of the company's sales are under contracts that provide for quarterly price adjustments with a lag for periods of raw material price increases during which there may be margin pressure (primarily for methanol, phenol and urea). The ratings also consider the potential impact of volatile energy prices on the company's margins (natural gas prices in particular affect its methanol prices), and foreign exchange risk since international operations account for 34% of sales (while recognizing that the risk is partially mitigated by having operations in many countries and by hedging).

Among the company's strengths are its leading market positions in resins (for the forest products industry and industrial applications) and in formaldehyde. Another positive rating consideration is the fact that once its credit facility that matures in July 2002 is replaced, the company will not face refinancing risk in view of the long-term maturities of its bonds. The ratings assume that future common dividends and distributions after 2002 will only be made if earnings and leverage measurements improve significantly.

The ratings also take into account uncertainty with regard to pending litigation commenced in November 2001 against the company by creditors of a successor to Borden Decorative Products Holdings, Inc., a former wholly owned subsidiary of the company. The action seeks to have a 1998 recapitalization transaction avoided as a fraudulent conveyance and asks for over $314MM. The company believes that it has strong defenses. In the event that Borden were to become liable, a negative rating action would result.

Factors that could result in a positive rating action include sustained improved operating margins, a material strengthening of the company's weak book equity, and clear future creditor protections as related to the company's policies regarding dividends and distributions. A downgrade could result from deterioration in operating results, liquidity, or other creditor protection measurements.

For FY ended 12/31/01 the company reported revenue of $1.4B, and operating income of negative $71MM after $144MM of charges for business realignment, impairments and other. Even if $161MM of charges are considered one-time in nature, adjusted EBIT was $89MM, and as of 12/31/01 the company continued to be highly leveraged with Debt excluding affiliate debt/ Adjusted EBIT of 6x, and negative book equity. Leverage is higher if loans payable to affiliates in the current amount of $66MM, and operating leases related to annual rentals of $20MM are considered. (It should be noted that the company has advised that most loans payable to affiliates are expected to be substantially paid during the year.) In addition, as of 12/31/01 the company reported that costs for environmental liabilities may exceed its $41MM reserve by up to approximately $30MM related to the cleanup of approximately 50 waste sites in pending proceedings under environmental laws, its reported unfunded non-pension post-employment benefit obligation totaled $151MM, and the company reports significant other liabilities. LTM 12/31/01 interest coverage was weak with Adjusted EBIT/Interest of 1.4x (1.6x assuming no affiliated company interest). EBIT adjustments for one-time items totaled $161MM, including charges of $144MM ($101MM for asset impairment that was primarily related to the shut down of its melamine crystal plant in Louisiana, $19MM for estimated environmental remediation costs, $13MM for plant closure costs, and $12MM for severance and employee costs), plus $16MM of pension settlement adjustments related to the food business. Capital expenditures have historically typically exceeded depreciation and amortization expense with last five-year capital expenditures of approximately $410MM compared with depreciation and amortization of $270MM. The company believes that 2002 and future capital expenditures will be approximately equal to depreciation and amortization. Return on assets was weak with Adjusted EBIT/Assets of 8%.

Since the company was purchased in a leveraged buyout by Kohlberg Kravis Roberts & Co. (KKR) in 1995, numerous businesses owned by the company and affiliates have been sold, some related debt has been repaid, and acquisitions have been made. Following the sale of the food and consumer resin assets in 2000 and 2001, the company is now focused upon the remaining chemical business. We understand that Borden may make acquisitions in its chemical business. Moody's believes that since the company is owned by a financial buyer, the company will eventually be sold most likely when industry and economic conditions improve. The indentures governing the two larger bonds, due 2021 and 2023, do not have a provision for redemption upon a change of control and therefore the creditworthiness of the purchaser would determine those ratings upon sale.

The annual preferred stock dividend payment to investors of $74MM was eliminated as of 12/31/01 in connection with a $614MM capital contribution of the preferred stock held by the company's parent. However, Moody's notes that the company has historically also paid significant common stock dividends and made other distributions or payments of affiliate loans. Significant proceeds from the 2000-2001 sale of the company's consumer adhesives business and its food affiliate's businesses were used to reduce the company's affiliate debt, and were not reinvested in the company. Proceeds from divestitures of the company's businesses and sale of assets totaled $258 million in 2001, part of which was used to repay affiliate debt, and dividends totaling $122 million were paid in 2001 (of which $74 million was preferred dividends, and $49MM was common dividends; the company has advised that the dividends were partially offset by receipt of $49MM of interest from its parent). In addition, the company's affiliate, Borden Food Holdings Corp. that guarantees the company's public debt and credit facility, held $434 million of cash as of December 31, 2001 from the sale of food assets, which is not going to be reinvested in Borden Chemical to reduce the company's public debt. We understand that the affiliates and parent currently do not expect to use this cash for dividends, but may use it for acquisitions. Borden Chemical expects to cancel a $405MM note receivable from its parent during 2002 that is accounted for as a reduction in equity.

During the past four years the company has taken large annual charges for impairment, restructuring and other. Following several years of rationalization, and after an anticipated goodwill impairment charge in the first quarter of 2002 related to accounting changes that are anticipated to total $30MM, the company does not expect further material charges. If significant charges were to continue, a negative rating action could result.

As of 12/31/01 Borden Chemical, Inc. had a $250MM revolving line of credit that matures July 13, 2002 (with $90MM of letters of credit outstanding), $11MM of international lines of credit, a separate $45MM line of credit facility for letters of credit that is fully secured by cash collateral, and $26MM of cash on hand. The company will be discussing a new credit facility with its banks to replace the $250MM credit facility to be used primarily for letters of credit. The existing $45MM line of credit for letters of credit will be terminated when a new credit facility is in place. The company's bond indentures permit secured debt, and if the credit facility were secured the rating of the existing notes will be lowered to B2 to reflect the contractual and effective subordination of the notes to the secured credit facility.

The provisions of the indentures governing the unsecured notes provide little bondholder protection, with no limitation on the amount of other indebtedness that may be issued by the company, no limitations on distributions, broad limitations on sale of assets, and no provision for redemption upon a change of control (except for the indentures governing the $78MM notes, due 2016, and the $49MM notes, due 2019, which do provide for redemption upon change of control). The indentures do generally limit secured debt and liens on the company's principal property, shares of capital stock or certain intercompany notes after the date of the indenture to 10% of consolidated shareholders' equity unless an equal and ratable security interest is granted to the notes.

The company currently operates 28 U.S. production and manufacturing facilities (including its largest in Louisville, Kentucky), and 21 foreign facilities.

Borden Chemical, Inc., based in Columbus, Ohio, is a chemical producer of primarily resins, formaldehyde, and coatings.

New York
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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