MOODY'S RAISES DEBT RATINGS OF FORT JAMES CORPORATION; SENIOR UNSECURED TO Baa2; SHORT TERM RATING TO PRIME-2
New York, 06-18-98 -- Moody's Investors Service raised the senior unsecured debt ratings of Fort James Corporation to Baa2 from Baa3, and upgraded the company's commercial paper rating to Prime-2 from Prime-3. The action reflects the company's improving earnings and cash flow, and the success in integrating the assets of the former Fort Howard Corporation and James River Corporation of Virginia, which were merged in 1997. The rating agency stated that the reduction in debt and preferred stock was also a significant factor in the rating change. Revised ratings are as follows:
Senior unsecured notes and debentures; to Baa2 from Baa3
Senior unsecured bank debt, to Baa2 from Baa3
Global MTN program, to Baa2 from Baa3
Senior unsecured shelf registration, to (P)Baa2 from (P)Baa3
Commercial Paper, to Prime-2 from Prime-3
PC Revenue Bonds, to Baa2 from Baa3
PC Revenue bonds, to Baa2 from Baa3
In announcing the rating changes, Moody's noted the reduction in expected annual interest expense which the company has achieved through its refinancing of high cost debt. Annual savings in interest expense are estimated at $50mm over the year earlier period, and interest expense is expected to continuing declining as the company reduces debt over the next three years. The rating agency also noted the company's complete elimination of numerous classes of preferred stock since the completion of the merger. Repurchases and conversions of approximately $740 million of preferred stock have effectively reduced annual fixed charges by nearly $60 million and simplified the capital structure.
A key factor in the rating decision was the company's success in achieving cost savings from the integration of the two company's following the merger. Current annual cost savings have already reached $90 million, and the company hopes to reach $150 million by the end of the year. Moody's estimates that interest coverage, currently at around 3.0x, will gradually increase if the company can continue to improve margins and reduce debt.
However, Moody's noted that there is a relatively high level of borrowing at the subsidiary level, which provides a modest level of structural subordination to debt at the Fort James Corp. level. The upgrade in the company's rating assumes that the company continues to reduce borrowing at the subsidiary level, with the bulk of future borrowings being issued by the parent company.
Although the company does not currently issue commercial paper, the increase in the short term rating to Prime-2 reflects an anticipation that the company will establish a program to enter the market, and that appropriate alternate liquidity arrangements will be available.
Fort James, headquartered in Chicago, Illinois, is one of the worlds largest manufacturers of tissue products in North America and Europe, with additional operations in packaging and communications papers.
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