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Rating Action:

MOODY'S LOWERS THE RATINGS OF OWENS-ILLINOIS' SECURED AND UNSECURED BONDS AND ASSIGNS B1 TO OWENS-BROCKWAY'S PROPOSED INCREMENTAL SENIOR SECURED TERM LOANS; RATINGS OUTLOOK REMAINS STABLE

19 Feb 2004
MOODY'S LOWERS THE RATINGS OF OWENS-ILLINOIS' SECURED AND UNSECURED BONDS AND ASSIGNS B1 TO OWENS-BROCKWAY'S PROPOSED INCREMENTAL SENIOR SECURED TERM LOANS; RATINGS OUTLOOK REMAINS STABLE

Approximately $7.3 billion of debt securities affected

New York, February 19, 2004 -- Moody's Investors Service downgraded the ratings for the senior secured notes and the unsecured notes at Owens-Brockway Glass Container Inc. ("Owens-Brockway") and the senior unsecured notes and convertible preferred stock at Owens-Illinois, Inc. ("O-I") following O-I's announcement that it has entered into exclusive negotiations to acquire BSN Glasspack, S.A. ("BSN"), the second largest glass container manufacturer in Europe controlled by investment funds advised by CVC Capital Partners Europe. Total consideration is approximately Euro 1.2 billion (approximately $1.5 billion) including the assumption of debt, which equates to a purchase multiple of approximately 5.8 times BSN's EBITDA of approximately Euro 200 million. Moody's also affirmed the existing rating for Owens-Brockway's senior secured credit facility and assigned a B1 rating to its proposed incremental term loans. Proceeds from the latter are intended to finance the acquisition. Refer to Moody's press release on BSN.

Moody's took the following rating actions:

Lowered to B2 from B1 $2.1 billion senior secured notes, due 2009 -2012

Lowered to B3 from B2 $450 million 8.25% senior unsecured note, due 2013

Lowered to Caa1 from B3 $1.4 billion senior unsecured notes at O-I, due 2005 -2018

Lowered to Caa2 from Caa1 $452.5 million convertible preferred stock at O-I

Affirmed B1 $1.9 billion senior secured credit facility

Assigned B1 to the proposed incremental term C loans totaling approximately Euro 1.3 billion

Affirmed B2 senior implied rating at O-I

Lowered to Caa1 from B3 senior unsecured issuer rating at O-I (non-guaranteed exposure)

The Speculative Grade Liquidity Rating is SGL-3.

The ratings outlook is stable.

The ratings are subject to review of final documentation.

Proceeds from the proposed incremental term C debt (approximately $1.3 billion) are intended to effect the acquisition, to refinance existing debt, to fund seasonal working capital needs, and to pay related fees and expenses. Incremental debt consists of approximately Euro 533 million at Owens-Brockway; Euro 303 million at European Acquisition; and a delayed draw loan Euro 306 million at European Acquisition. The European delayed draw facility is to redeem both tranches of BSN's existing senior subordinated bonds, if they are put to O-I at 101 with a change of control. Debt is adjusted to include the USD equivalent of approximately Euro 166 million outstanding under the to be assumed Euro-denominated 211 million accounts receivable securitization program.

The ratings reflect weak consolidated credit metrics pro-forma for the proposed transactions. Concern remains regarding the susceptibility of margins to rising natural gas and resin costs and to adverse effects of weather on volume in certain geographies. In Moody's opinion, these issues are exacerbated by challenging operating environments and soft results in both North American Glass and Plastics (combined accounting for over 40% of pro-forma EBIT). Less than optimal working capital management, sizable capital investment requirements, continuing annual asbestos cash payments of approximately $200 million and cash pension/OPEB contributions of roughly $35 million are also reflected in the ratings.

The weakness of the consolidated balance sheet underscores the ratings given the large charges taken at O-I during fourth quarter 2003 for the impairment of goodwill (approximately $750 million) and the increase in the asbestos liability (approximately $450 million). Total pro-forma secured debt accounts for over 65% of total debt in the proposed capital structure, and senior secured leverage is high at over 3 times pro-forma combined EBITDA. The rating is further constrained by uncertainty in O-I's executive leadership (search of permanent CEO still in process) at this critical juncture of potentially undertaking substantial business ventures with the proposed acquisition and other strategic initiatives.

More positively, the ratings reflect Moody's expectation of somewhat improved consolidated financial performance pro-forma for the strategic acquisition with meaningful reduction in consolidated financial leverage throughout the intermediate term, albeit primarily driven by improved earnings rather than permanent debt reduction. The ratings incorporate O-I's proven historical record of efficient integration, consistent global leadership in its core business, and solid global manufacturing efficiencies. The ratings acknowledge the structuring benefit in the proposed amended senior secured credit agreement of no annual term amortization during the near to intermediate term. Moody's views positively the strategic nature of the proposed acquisition, which should strengthen O-I's position in Europe while adding minimal volatility (roughly 70% of BSN's revenue comes from higher margin wine, spirits, and beer, which are also less susceptible to conversion from glass than non-alcoholic beverages).

Adequate liquidity pro-forma for the proposed transactions is expected, although draft revisions of financial covenants were not available at the time of this assessment. The rating anticipates that the pro-forma combined entity will continue to generate sufficient cash from operations to satisfy its working capital, capital investment, asbestos and pension cash needs. Modest usage under the committed $600 million revolver primarily for seasonal needs, letters of credit, and cash management is expected.

The stable ratings outlook reflects limited tolerance for modest adverse fluctuations in pro-forma credit statistics while remaining at current ratings. Any deviation from core business and financial strategies (i.e. any further acquisitions debt funded or otherwise and/or uses of cash other than for the permanent retirement of debt) would not only jeopardize the stability of the outlook, but could trigger a downgrade. The stability of the outlook and the fundamental ratings are also sensitive to incremental increases in pro-forma financial leverage (adjusted to include securitizations, the asbestos liabilities, and preferred stock is roughly 5.5 times EBITDA); deterioration in EBITDA less capital expenditures coverage of pro-forma interest expense plus preferred dividends, which is already thin at approximately 1.5 times; and reduction in free cash flow relative to total debt, which is already weak being in the low single digits pro-forma for the proposed transactions. Numerous quarters of consecutive improvement in consolidated credit statistics would be required before the outlook would change to positive.

The assignment of B1 ratings to the proposed incremental term debt and the affirmation of the B1 rating for the existing senior secured credit facility reflect the expectation of full collateral coverage in a distress scenario. The rating also reflects the priority position of the bank debt in the proposed capital structure (accounting for approximately 33% of total debt) and the benefit of additional tangible collateral pledged by foreign subsidiaries that is not available to the senior secured notes. However, in Moody's opinion excess collateral coverage net of standard haircuts is weak for the rating. The B1 rating incorporates the priority position in the capital structure, the benefits and limitations of the global collateral sharing arrangement, and upstream guarantees from subsidiaries as well as a downstream guarantee from the immediate parent holding company of the European Borrower, BSN.

The downgrade of the rating for the existing senior secured notes to B2 from B1 reflects the reduction in collateral coverage from residuals after giving consideration to the sizable proposed pro-forma bank debt at approximately $2.4 billion. The rating also reflects the increased effective subordination of the secured notes to approximately $1.3 billion of incremental senior secured bank debt.

The downgrade of the ratings for the remaining existing unsecured exposures (senior unsecured notes at Owens-Brockway, at O-I, and the preferred stock at O-I) reflects the increased effective subordination of the notes to the substantial amount of pro-forma proposed senior secured debt (approximately $4.6 billion). The ratings also reflect the increased severity of default given the greater financial leverage and reduced enterprise value given the weaker than expected consolidated performances in 2003. Additionally, the downgrade to Caa1 from B3 for O-I's senior unsecured notes and the downgrade to Caa2 from Caa1 for its preferred stock reflects their effective and contractual subordination to the sizable asbestos liabilities at the holding company, and the increased effective subordination to the sizable incremental total liabilities at the operating entities.

Headquartered in Toledo, Ohio Owens-Illinois, Inc. is a global manufacturer of glass containers and plastic products. Consolidated sales at December 31, 2003 were $6 billion. Headquartered in Paris, France, BSN Glasspack S.A. ("BSN") is the second largest European manufacturer of glass containers used primarily for wine, spirits, beer, non-alcoholic beverages, and specialty foods. It has manufacturing facilities in France, Germany, Spain, and the Netherlands. Annual sales are approximately Euro 1 billion ($1.5 billion).

New York
Patrick Finnegan
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kendra M. Smith
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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