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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
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,
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
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).
Corporate Finance Group
Moody's Investors Service
Kendra M. Smith
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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