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Rating Action:

MOODY'S UPGRADES UNION CARBIDE'S SR. UNSECURED DEBT TO Ba2; OUTLOOK STABLE

13 Mar 2006
MOODY'S UPGRADES UNION CARBIDE'S SR. UNSECURED DEBT TO Ba2; OUTLOOK STABLE

Approximately $ 822 Million of Debt Securities Affected.

New York, March 13, 2006 -- Moody's Investors Service upgraded the ratings on the senior unsecured debt of Union Carbide Corporation (Carbide) to Ba2 from B1. The upgrade reflects the significant decline in the number of outstanding asbestos-related claims, absolute number new claims, and the significant decline in yearly legal and settlement costs, as well as the significant reduction in balance sheet debt. Carbide's rating outlook is stable. Moody's also affirmed the A3 ratings of Carbide's ultimate parent company, The Dow Chemical Company (Dow), and reiterated its negative rating outlook.

Upgrades:

..Issuer: Brownsville TX, Navigational District

....Revenue Bonds, Upgraded to Ba2 from B1

....Senior Unsecured Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: Camden (County of) GA, Development Authority

....Senior Unsecured Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: Gulf Coast Waste Disposal Authority, TX

....Revenue Bonds, Upgraded to Ba2 from B1

....Senior Unsecured Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: Hot Springs (City of) AR

....Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: Kanawha (County of) WV

....Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: Kanawha (County of) WV, County Commission

....Revenue Bonds, Upgraded to Ba2 from B1

....Senior Unsecured Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: Mobile (City of) AL

....Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: Ohio Water Development Authority

....Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: Puerto Rico Ind Med&Env Poll Ctl Fac Fin Auth

....Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: South Charleston (City of) WV

....Revenue Bonds, Upgraded to Ba2 from B1

....Senior Unsecured Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: St. Charles (Parish of) LA

....Senior Unsecured Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: Tyler (County of) WV

....Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: Union Carbide Chemicals & Plastics Co. Inc.

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba2 from B1

..Issuer: Union Carbide Corporation

....Senior Unsecured Medium-Term Note Program, Upgraded to Ba2 from B1

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba2 from B1

..Issuer: West Side Calhoun (Cnty of) TX, Navig. Dist.

....Senior Unsecured Revenue Bonds, Upgraded to Ba2 from B1

..Issuer: West Side Calhoun (County of) TX

....Revenue Bonds, Upgraded to Ba2 from B1

Outlook Actions:

..Issuer: Union Carbide Chemicals & Plastics Co. Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Union Carbide Corporation

....Outlook, Changed To Stable From Negative

The upgrade reflects Moody's belief that Carbide may be able to address its current and future asbestos liability without increasing its existing reserve balance; $1.5 billion as of December 31, 2005. The decline in cases and average settlement values over the past 12 months has been substantial with total legal and settlement costs declining from roughly $386 million in 2004 to $214 million in 2005. Additionally, new claims have fallen to an average of seven thousand per quarter, over the last two quarters of 2005, from an average of over 14 thousand per quarter in 2004. While Moody's does not expect these costs, and the number of new claims, to continue to decline at the same pace, the company's projected liability appears to be more manageable, relative to the financial resources available to Carbide (primarily the value of its wholly owned assets and its interest in several profitable joint ventures). Moody's noted that Dow has not taken any dividends from Carbide since 2002. If Dow elects to keep elevated levels of cash at Carbide on a long-term basis, this would further improve the credit profile of Carbide. As of December 31, 2005, Carbide had over $1.6 billion on loan to Dow, a large part of this cash was related to the sale of Carbide's equity interest in UOP LLC in November of 2005. Furthermore, Carbide reduced its debt in 2005 by over $580 million (including $135 million of debt payable to Dow) to roughly $830 million.

Carbide Ba2 rating reflects Moody's concern over the inherent uncertainty with regard to product liability litigation, especially since a Carbide subsidiary was a producer of asbestos. While settlements with individual claimants have declined, Moody's remains concerned that there is a potential for additional litigation that is not captured in the existing caseload. Carbide's success against Kelly-Moore may discourage similar lawsuits from other companies, but Moody's noted that there is one similar lawsuit in California.

Carbide's stable outlook reflects the balance between the uncertainty with regard to asbestos product liability exposure and the decline in spending on settlements and legal expenditures related to these lawsuits. Moody's is unlikely to raise the company's rating further until the company has experienced a sustained decline in settlement costs and new cases from current levels, and no new product liability issues have arisen. Additionally, in the unlikely event that federal legislation is passed that would greatly reduce uncertainty over Carbide's ultimate asbestos-related liability, Moody's could upgrade the company's senior unsecured ratings. However, if the number of new cases increases significantly or if there is a substantial and sustained increase in settlement and litigation costs, Moody's would likely review the appropriateness of the Ba2 ratings.

Carbide's Ba2 rating also reflects the absence of a guarantee from Dow. However, Moody's believes that Dow will continue to support Carbide unless it is overwhelmed by the combination of unusually large settlements and the exhaustion of insurance coverage.

According to Moody's recently release rating methodology for the chemical industry, Carbide would map to an average rating in the high Ba range, assuming no financial support from Dow and after capitalizing its asbestos liability as debt on the balance sheet. The key factor driving the company's ratings is its cost position which includes a measure of contingencies (i.e., cash expended on product liability or environmental issues, etc.) as a percentage of operating cash flow. In addition, the company's business profile is weak given its large exposure to volatile feedstocks and somewhat limited operational diversity. Average financial metrics for the company are relatively strong indicating a higher (Baa) rating.

Moody's also affirmed the A3 corporate family ratings of Dow and reiterated its negative outlook. Although favorable ethylene chain global supply-demand fundamentals are expected to allow Dow to generate free cash flow in excess of $2.0 billion again in 2006 (excluding pension contributions), Moody's remains concerned that the company's financial metrics on average do not support an A3 rating at the current debt level. The negative outlook reflects Moody's concern that Dow financial performance may not rise to the level necessary that would, on average, support an A3 rating over the cycle. Moody's noted that Dow had an unusually strong fourth quarter, relative to its competitors, and was able to overcome significant problems in the US (hurricane related) to generate higher than expected earnings.

Headquartered in Midland, Michigan, The Dow Chemical Company is a diversified chemicals and plastics producer that generated over $46 billion of revenues in 2005. Union Carbide, headquartered in Houston, Texas is a wholly-owned subsidiary of Dow. Union Carbide's 2005 revenues totaled $6.4 billion.

New York
Mark Gray
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
John Rogers
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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