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20 Sep 2007
Moody's Lowers Avery Dennison's Ratings To Baa1, Rates New Notes Baa1, Ratings Remain Under Review For Possible Downgrade
Avery's P-2 commercial paper ratings are affirmed.
New York, September 20, 2007 -- Moody's Investors Service lowered the senior unsecured debt ratings of
Avery Dennison Corporation (Avery) to Baa1 from A3 and assigned Baa1 ratings
to a proposed $250 million senior note issue of ADOP Company ("ADOP").
These notes were assigned Baa1 ratings due to the full and unconditional
guarantee from Avery. Both the new ratings of ADOP and Avery's
existing Baa1 ratings remain under review for possible further downgrade.
Moody's also affirmed Avery's short-term rating for
commercial paper at Prime-2.
The Baa1 ratings remain under review for possible downgrade as the company
has not specified the structure of the remaining long-term financing
for the Paxar acquisition. The current Baa1 ratings are based on
an assumption that Avery will issue both a term debt security and a hybrid
security by the end of October 2007 to further reduce outstanding commercial
paper borrowings that were used to fund the June 15th, 2007 purchase
of the Paxar Corporation (Paxar - unrated) for approximately $1.34
billion. Additionally, the Baa1 ratings are contingent upon
Avery issuing a hybrid security that will have sufficient equity-like
features to allow them to receive at least basket "C" designation (50%
equity treatment; please refer to Moody's Rating Methodology "Refinements
to Moody's Tool Kit: Evolutionary, not Revolutionary!",
February 2005), furthermore it assumes that the size of the hybrid
will be roughly $600 million. If this hybrid is issued by
Avery, the ratings would likely be affirmed at Baa1 and the rating
outlook would be negative. The negative outlook reflects,
in part, the potential challenges management faces in achieving
proposed synergies from the Paxar acquisition. In the event that
this hybrid security, after using Moody's methodologies is assigned
either a basket of A or B, or not given any equity credit at all
or the company issues less than $600 million of these securities,
the debt ratings for all of Avery's and ADOP's unsecured notes
would likely be lowered to Baa2.
Moody's rating review will continue to focus on the nature and structure
of the financing for the acquisition and the ratings are subject to a
final review of documents and offering memorandums.
The following ratings are assigned and remain under review for possible
- proposed senior notes (2017) at Baa1*
The following ratings are lowered and remain under review for possible
Avery Dennison Corporation
- Medium term notes -- to Baa1 from A3
- Senior unsecured notes -- to Baa1 from A3
- Multiple Shelf ratings -- to (P)Baa1 from (P)A3; to
(P)Baa3 from (P)Baa2
The following rating was affirmed:
- Commercial Paper of Prime-2
Avery's Baa1 ratings incorporate the high cash price paid for the
acquisition of Paxar. The acquisition, while strategic in
nature as it increases Avery's presence in the global Retail Information
Services business, has increased Avery's balance sheet debt
by 148% since the beginning of 2006 to $2.4 billion.
However this sizeable increase in debt is also attributable to the fact
that Avery's balance sheet debt at the end of 2006 was at its lowest
level, $968 million, in the last five years.
The ratings action also recognizes the very high EBITDA multiple of the
purchase price, before giving effect to the synergies, this
multiple is in the low teens. With synergies this metric is in
the mid to high single digits. The successful achievement of the
expected $115- $125 million in synergies, over
a 2-3 year time frame, will be a key element in generating
the increased cash flow necessary for future debt reduction. The
potential for a weaker credit profile will override the strategic benefits
of combining these two businesses until the incremental debt is reduced
and combined cash flows improve as expected over time. The Baa1
ratings are supported by relatively stable earnings and cash flow generation.
Avery Dennison is a global leader in pressure sensitive adhesives,
labels and other industrial marking systems. These markets exhibit
more stable demand than most other industrial markets. Additionally,
these markets are expected to demonstrate good demand growth over the
next several years. Diversity in customers and end-market
applications also provides solid stability to revenues and gross cash
Avery Dennison Corporation, headquartered in Pasadena, California,
is the largest global producer of pressure-sensitive and printable
labels. Avery's business segments include Pressure-sensitive
Materials, Office and Consumer Products, and Retail Information
Services. In addition to the reporting segments, the company
has other specialty converting businesses consisting of businesses that
produce specialty tapes and highly engineered labels including radio frequency
identification inlays and labels and other converted products.
The company reported sales of $5.6 billion for the year
ending December 31, 2006.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Corporate Finance Group
Moody's Investors Service
No Related Data.
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