MOODY'S RATES EAGLE-PICHER'S SR. SUB. NOTES B3; ITS SR. SEC. CREDIT FACILITIES B1; AND E-P HOLDINGS' PREFERRED STOCK "caa"
New York, 02-11-98 -- Moody's Investors Service assigned a B3 rating to Eagle-Picher Industries, Inc.'s proposed $220 million issue of senior subordinated notes, due 2008, and B1 ratings to its $160 million revolving credit facility, its Tranche A $100 million term loan, its Tranche B $50 million term loan, and its Tranche C $75 million term loan. In addition, Moody's assigned a "caa" rating to the $80 million preferred stock offering of the parent company, E-P Holdings. The outlook is stable.
Eagle-Picher will be acquired by Granaria Industries from the Eagle-Picher Industries, Inc. Personal Injury Settlement Trust for about $745 million, including fees and expenses. The purchase price will be funded with the proceeds from the senior subordinated notes, $304 million of the secured credit facilities, a $100 million equity contribution by Granaria Industries and Lange Voorhout Investment (62.5% and 37.5%, respectively); and the E-P Holdings preferred stock offering. Following the acquisition, Granaria Holdings will own 52.5% of E-P Holdings, LV Investment will own 37.5% and certain members of management will own 10%.
The ratings reflect Eagle-Picher's high leverage as a result of the transaction; its thin interest coverage; and the cyclical environment in which its automotive and machinery businesses operate. In addition, each of Eagle-Picher's business units has high customer concentration, while the largest--the automotive unit--is also exposed to intensely competitive pricing due to its heavy reliance on the Big Three automotive companies and OEMs.
However, the ratings also consider Eagle-Picher's long history of operating earnings, experienced management team, which has remained with the company for over 15 years, and its opportunities for growth. The company's vulnerability to cyclicality is mitigated by its diversification of products and markets served. The proprietary nature of its products provide barriers to competition. In addition, Eagle-Picher has dominant market positions in several product lines, including the automotive compressor gasket, brake insulators, diatomaceous earth filter aids, and aerospace and thermal batteries.
The B1 ratings on the $385 million of bank credit facilities also reflect the benefits and limitations of the collateral package. Obligations under the credit facilities are guaranteed by the parent company and its domestic subsidiaries. The obligations are secured by a first priority security interest in all the assets of the company ( subject to prior liens associated with the $18 million of secured industrial revenue bonds) and its U.S. subsidiaries. Moody's considers collateral coverage to be thin from a tangible asset standpoint.
The B3 rating on the notes reflects their contractual subordination to all of Eagle-Picher's senior debt. The notes are guaranteed by the parent and all the domestic subsidiaries on a senior subordinated basis. Pro forma for the transaction, as of November 30, 1997, senior debt was approximately $327.5 million, of which $304.1 million represents bank debt.
The "caa" rating on Eagle-Picher Holdings' preferred stock offering reflects its effective and structural subordination to all of Eagle-Picher's creditor and stockholder obligations. Further, no dividends will accrue on the preferred stock prior to March 1, 2003. On a pro forma basis, as of November 30, 1997, total debt of Eagle-Picher Holdings and its subsidiaries was approximately $547.5 million.
Pro forma for the acquisition, Eagle-Picher's debt is substantial at approximately $627 million (including $80 million of preferred stock). Debt-to-book capitalization is 86% and estimated debt/EBITDA is 6 times. (Tangible equity is negative $206 million as a result of the $297 million of intangibles.) EBITDA minus capital expenditures is thin at approximately 1 times coverage. Going forward, Eagle Picher's capital expenditures are expected to be lower and therefore Moody's anticipates coverage to improve by the following year to over 1.5 times. Despite being the low cost producer for many of its products, Eagle-Picher's EBITA return on tangible assets is reasonable at about 10%.
Due to the mature industries in which several of Eagle-Picher businesses operate, Moody's expects revenue growth to moderate. In addition, while the company generates 20% of its revenues overseas, a portion of those sales are in Asia and therefore potentially vulnerable to its economic slow down. However, Eagle-Picher has developed several opportunities for its products in high growth industries including the satellite, semi-conductor and fiber optic cable.
The $385 million of senior secured bank credit facilities will be led by ABN AMRO. The revolving credit will mature in February 2004, the Tranche A term loan in the fifth year, Tranche B in the seventh year, and Tranche C in the eighth year.
The $220 million new issue of senior notes as well as the $80 million of preferred stock have been designed to permit resale under SEC Rule 144A.
Eagle-Picher Industries, Inc., headquartered in Cincinnati, Ohio, is a diversified manufacturer of industrial products for the automotive, aerospace, defense, telecommunications, food and beverage and construction industries.
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