MOODY'S UPGRADES FMC CORP.'S SR. UNSECURED RATINGS TO Baa3; OUTLOOK STABLE
Approximately $1.1 Billion of Long-Term Debt Affected
New York, June 22, 2005 -- Moody's Investors Service upgraded all of FMC Corporation's ("FMC")
senior unsecured debt ratings to Baa3. This ratings action was
consistent with Moody's previous statement that the existing debt
ratings would be raised to Baa3 upon completion of an amended bank facility
that incorporates terms and conditions suitable for an investment grade
profile. As part of this action, Moody's upgraded to
Baa3 from Ba1, FMC's amended senior credit facility consisting
of a $250 million term loan A and a $600 million revolving
credit facility, both now due June 2010. Proceeds from the
amended credit facility will primarily be used to redeem the $355
million 10.25% senior secured notes due 2009. The
other debt ratings were raised to reflect the banks' willingness to forego
a secured position. Moody's also withdrew FMC's Ba1 senior
implied rating and SGL-2 speculative grade liquidity rating.
The upgrade also reflects Moody's belief that the company has made significant
progress reducing contingent liabilities and improving credit metrics,
and that a general economic upturn will translate into improved performance
for 2005 and 2006. This action completes a review that was initiated
on June 6, 2005. The ratings outlook is stable.
The following summarizes the ratings activity:
$45 million debentures due 2011 - raised to Baa3 from Ba2
Medium-term notes due 2005 to 2008 - raised to Baa3 from
Senior unsecured industrial revenue bonds due 2007 to 2032 -- raised
to Baa3 from Ba3
$600 million revolver due 2010 - raised to Baa3 from Ba1
$250 million term loan A due 2010 - raised to Baa3 from
$355 million 10.25% senior secured notes due 2009
- raised to Baa3 from Ba2*
* Will be withdrawn upon redemption.
Senior Implied Rating - Ba1
Issuer Rating - Ba3
Speculative Grade Liquidity Rating - SGL-2
$100 million senior secured letters of credit facility due 2009
The revised ratings reflect FMC's moderate leverage; product,
customer, and geographic diversification; good business scale
with 2004 revenues exceeding $2 billion; and leading market
positions in such products as peroxides, carrageenan, and
soda ash (the company typically has number one or two market share in
most of its product lines). In addition, Moody's believes
FMC's results are somewhat less susceptible to the economic cycle than
other chemical manufacturers due to the size of their agricultural and
biopolymers businesses. Additionally, Moody's believes that
the impact of rising petrochemical feedstock and energy costs is less
than many other commodity chemical producers'. The upgrade is also
supported by improving operating margins, the strong performance
of the Agricultural segment, improving supply/demand fundamentals
within the Industrial Chemicals segment, and the use of near-term
asset sales to support debt reduction. However, the ratings
also consider agricultural market risks including the seasonality of sales,
the significant influence of weather, and the effect of crop prices
and government subsidies on farmers' use of FMC's herbicide and insecticide
products. The ratings also reflect continued spending for environmental
remediation, an underfunded pension balance, operating leases,
the cylicality of the Industrial Chemicals segment, and the potential
for higher input costs to pressure operating margins.
The primary borrowers under the amended credit facility (rated Baa3) will
be FMC Corp. and certain foreign subsidiaries. Domestic
borrowings under the credit facility will be guaranteed by FMC's direct
and indirect material domestic subsidiaries and international borrowings
will be guaranteed by FMC Corporation. The credit facility will
be unsecured, a material change from the current facilities.
Moody's does not believe that the guarantees, as currently structured,
represent enough of a benefit to the banks to suggest notching differences
with other debt. FMC's position as a borrower is further improved
by the elimination of a mandatory prepayment provision and by the removal
of limitations on acquisitions and dividends. In the event that
both S&P and Moody's continue to rate FMC investment grade,
the material adverse change and litigation representations required at
every borrowing will also be eliminated.
FMC's existing $355 million 10.25% senior secured
notes are to be redeemed as part of the refinancing. This debt
is currently secured on a second-priority basis by certain domestic
manufacturing and processing facilities and by FMC's shares of FMC Wyoming
Corp., and are guaranteed by the same subsidiaries as the
credit facility. The security falls away if FMC's bank facilities
are unsecured. Many of the provisions (including limitation related
to asset sales, additional indebtedness, and restricted payments)
also fall away in the event that both S&P and Moody's rate the 10.25%
notes investment grade. FMC's existing medium-term notes
and debentures have substantially the same security provisions as the
senior secured notes, and with the banks having released their security
interests the remaining medium-term notes and debentures are equally
and ratably positioned with the unsecured bank facility.
The ratings are further supported by FMC's moderate leverage and the fact
that the proposed refinancing will reduce the company's annual interest
expense by a run rate of approximately $20 million. FMC's
reported interest expense in 2004 was just over $80 million.
The company has announced its intention to reduce net debt to $600
million by the end of 2005. The ratings also incorporate more favorable
industry dynamics within FMC's soda ash product line, whereby soda
ash is the largest component of Industrial Chemicals revenues (FMC markets
soda ash through its 87.5% interest in FMC Wyoming Corp.).
Soda ash capacity utilization has significantly improved from the particularly
weak levels experienced in 2000 and 2001, and current operating
levels are close to 100% for operating units in the U.S..
Moreover, the closure of American Soda by Solvay and price increases
announced by the industry should significantly improve operating performance
in 2005. Moody's recognizes that the company will not realize the
full benefit of these price increases in 2005 as a significant portion
of customer contracts contain price restrictions. Most of these
restrictions should expire by the end of 2006.
The ratings also reflect improving fundamentals in phosphorous chemicals
(Astaris) and hydrogen peroxide, which have also benefited from
higher demand and industry capacity shut-downs. Within North
America, FMC is a leading producer of hydrogen peroxide and Astaris
is the second leading producer of phosphorous chemicals, behind
Innophos. Moody's expects that FMC will benefit from the improving
economy in North America and the tighter supply/demand balance for both
of these products. Nevertheless, Moody's is concerned that
Astaris is at a moderate cost disadvantage compared to Innophos,
due to the lack of vertical integration and the inability to produce all
of its downstream products from wet acid. Astaris, uses thermal
acid to produce certain of its products.
The ratings also consider the strong performance of FMC's Agricultural
segment, driven by a favorable global farm economy and above-normal
pest pressures in Latin America. The Agricultural segment's EBITDA
had been steady at $100 million over the three years ending 2003
and increased to just under $150 million in 2004. Operating
margins have improved above 20%. Moreover, this segment
should continue to post good earnings due to a healthy pipeline of new
products and high crop prices. Moody's also derives comfort from
the fact that insecticides (75% of Agriculture segment revenue)
tend to be less susceptible to competition from GMO crops compared to
herbicides. However, the ratings recognize that FMC is a
small player in both insecticides and herbicides and actions by competitors
could have a significant negative impact on FMC's financial performance.
The stable outlook reflects Moody's expectation that the company will
generate at least $120 million of free cash flow in 2005,
and that it will sustain or increase the current volume of business.
The ratings could be further upgraded if stronger-than-expected
demand or a further reduction in contingent liabilities results in a sustainable
annual retained cash flow to adjusted debt above 35%. Conversely,
the ratings or outlook could be lowered if a debt-financed acquisition
or a reversal in recent positive demand trends results in adjusted debt
to EBITDA exceeding 4.0 times or free cash flow to adjusted debt
less than 10% over the next 12 months. Moody's notes that
upon completion of management's often stated goal of reaching investment
grade further debt reduction in 2006 and 2007 is likely to be limited.
At some point, Moody's expects FMC to consider the reinstitution
of dividends and other mechanisms to return cash to shareholders.
Moody's believes that these shareholder efforts will remain consistent
and balanced with the goal of maintaining an investment grade profile.
The rating also derives support from FMC's strong liquidity, supported
by the amended $600 million revolving credit facility, a
significant pro forma unrestricted cash balance, a favorable debt
maturity profile, as well as improving earnings, primarily
stemming from the strong performance of the agricultural business.
Furthermore, the city of San Jose approved a two-phase purchase
agreement with FMC with respect to 75 acres of property for a purchase
price of $81 million. The initial phase of this agreement
was completed in the first quarter for some $56 million.
However, the rating also reflects seasonality stemming from the
agricultural business, the likelihood for increased capital spending,
and that spending for environmental remediation and other legacy liabilities
will continue to pressure cash flow. More specifically, Moody's
estimates that the company will spend approximately $20 million
in 2005 for the remediation and shutdown of the Pocatello, Idaho
facility as well as other restructuring spending. Additionally,
Moody's anticipates voluntary pension contributions continuing in 2005
and beyond (pension plan was funded 86.2% and 85.9%
as of 2003 and 2004 year-end, respectively). Overall,
Moody's expects the company will generate free cash flow in the range
of $120 million in 2005 (excluding Astaris payments) and will be
slightly higher in 2006.
FMC Corporation is a diversified chemicals company headquartered in Philadelphia,
Pennsylvania. The company reported revenues of $2.1
billion for the LTM ended March 31, 2005.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service