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19 Jan 2006
MOODY'S REVISES AMCOR'S RATINGS OUTLOOK TO NEGATIVE FROM STABLE
Approximately A$3 billion in debt securities affected
Sydney, January 19, 2006 -- Moody's Investors Service today affirmed Amcor Limited's (Amcor)
senior unsecured ratings of Baa1 and, at the same time, changed
the ratings outlook to negative from stable. The change in outlook
reflects Moody's expectation that Amcor's financial profile
will experience pressure, given continued input cost increases and
a subdued growth outlook in certain key markets.
Moody's notes Amcor's ratings reflect its:  Strong
diversity in operating risk, given its geographic, product
category and customer spread;  Leading marketing positions,
either as No. 1 or No. 2 in its major areas of operation,
specifically Australasian packaging, global PET, and European
flexible packaging; and  High exposure (approx. 80%
of revenue) to the stable growth end-markets for food and beverage
Furthermore, the ratings consider the challenges associated with:
 Sustaining margins, given cost pass-through risk
and the potential for market fragmentation in several areas of operation,
including risk of increasing customer turnover;  Maintaining
product development capabilities to meet customer needs, given potential
for shifts in consumer preferences;  Ongoing challenges associated
with managing a highly segmented business; and  Prospective
event risk should current management strategy have limited upside impact
on the company's share price and consideration is then given to
either major assets sales or de-merger of businesses.
"Amcor's profit growth has become less robust as the extent
of the company's operations has broadened -- inevitably,
not all of its markets will perform strongly concurrently" says
Moody's Senior Credit Officer Charles Macgregor.
Consequently, Moody's has modest expectations as to profit
growth, which will be a factor of increased demand for existing
products, the potential impetus provided by new products that do
not substitute or cannibalise existing products, and further efficiency
gains. Offsetting this trend could be competitive pressures on
prices or increasing input costs.
The company is sensitive to the rising costs of certain raw materials,
particularly resin -- a key ingredient in many packaging products.
Amcor has the ability to pass on price increases in many markets,
although given the competitive nature of some end-markets and/or
push back by major customers, an associated lag may be apparent,
especially during major spikes in input prices.
Moody's Macgregor adds "Overall operating margins may be subject
to pressure should resin prices and, to a lesser degree energy costs,
continue to increase."
In the last 18 months, Amcor significantly increased its effective
dividend payout by sourcing shares on market to nullify the EPS impact
of re-invested dividends. Moody's is concerned that
the company is becoming increasingly sensitive to EPS dilution which may
influence its appetite for further capital management initiatives.
In addition, Moody's Macgregor explains "The inability
of the current management strategy to bolster the share price and market
confidence could lead to the emergence of event risk in the form of either
a demerger or major asset sales."
Amcor has three hybrid instruments that will potentially convert to equity
over the next 18 months. Its profile could be affected by efforts
to minimize the impact of EPS dilution from these conversions.
Amcor has a weak ability to generate free cash flow -- a result of
its modest outlook for growth in operating cash flow, robust near-term
capital expenditure requirements and dividend commitments to equity investors.
Moody's perceives this situation to represent a risk. Any
further deterioration could diminish ability to reduce debt appropriately
- if margins fall -- to sustain the current rating.
The rating outlook is negative, reflecting increasing volatility
in Amcor's operating environment. Its financial metrics are
weak for the rating level and unlikely to improve in the short term,
given management's current financial policies and the lack of potential
for free cash flow-driven debt reduction.
The rating outlook could stabilise with evidence of sustained traction
in improving margins from its European operations, and a less aggressive
approach towards shareholder returns. A sustained improvement in
EBITA/revenue to above 10%, coupled with interest coverage
of over 4.0x, free cash flow/adjusted debt of over 3%,
and adjusted debt/adjusted EBITDA below 3.0x, could be evidence
of a stabilizing outlook.
Further evidence of a weakening in Amcor's operating environment,
resulting in diminished free cash flow, and/or an increase in adjusted
debt/adjusted EBITDA ratio to above 3.5x could result in downward
rating pressure. In this context, debt funding for capital
management initiatives could also act as a trigger for rating action.
Amcor Limited, based in Melbourne, Australia, is a leading
global packaging concern.
Charles F. Macgregor
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Pty Ltd
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100
Corporate Finance Group
Moody's Investors Service Pty Ltd
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100
No Related Data.
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