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Announcement:

Moody's changes DuPont's outlook to stable from negative

24 Nov 2010

DuPont's A2/Prime -1 ratings affirmed

New York, November 24, 2010 -- Moody's Investors Service affirmed the A2 senior unsecured and the Prime-1 commercial paper ratings of E. I. du Pont de Nemours and Company (DuPont) and changed the rating outlook to stable from negative. The move to a stable outlook reflects Moody's belief that it is likely that DuPont will be able to generate stronger credit metrics in 2011 and 2012 than in 2010. The benefits from a strong agricultural market, a weaker U.S. dollar, successful cost cutting programs, improvements in working capital management, and solid growth in developing countries should enable the company to report increasing earnings despite the prospect of a slow growth U.S. economy and moderate exposure to the housing/construction and automotive industries.

"The improved forecast reduces the risk that DuPont's financial performance will come under pressure as a result of weak market conditions," said Moody's analyst Bill Reed. "Additionally, the company is benefiting from a number of past and ongoing proactive measures that have generated cash. When we changed the outlook to negative in February of 2009 we noted that DuPont's rating outlook could revert to stable over time if the company is able to weather the global macroeconomic downturn and pursue its cash generating strategies while retaining ample financial flexibility."

DuPont's A2 and Prime-1 ratings reflect its sizeable standing as a leading science and technology company with strong positions in chemicals, polymers, specialty materials, and agricultural products. Well-developed brands and disciplined portfolio management have enabled the company to maintain strong market positions in all of the company's major businesses. The combination of technology, process expertise, economies of scale and ongoing cost reductions provide a competitive advantage in many of the company's markets.

Diversity of customers and end-markets are also expected to provide a measure of stability to earnings and cash flow. As an example of this, the current strength of the agricultural platform and the prospect, longer term, of growth in overseas markets among various segments, along with its historic ability to implement price increases offsetting higher raw material costs are helping to mitigate weakness in the DuPont businesses that serve the global construction and automobile markets.

In 2010, DuPont is experiencing sequential improvement, on a quarterly basis, with volume and product prices improving across most segments. Some of this improvement reflects steps DuPont took during 2009 when difficult market conditions included a global decline in construction, motor vehicle sales and consumer spending that resulted in customer inventory reductions across most supply chains. DuPont has successfully completed actions, specifically designed to bolster cash flow addressing these market challenges. Moody's views these actions as a positive step in protecting DuPont's credit profile going forward.

While Moody's expects DuPont's performance to continue improving we remain concerned with several key leverage metrics. Specifically, over time we expect to see retained cash flow to net debt to move above 30% and net debt to EBITDA to remain less than 2.3x on a sustainable basis. If DuPont's credit metrics are persistently weaker than expected we could review DuPont's ratings with negative implications in light of the then current market conditions and management's ongoing and incremental efforts to bolster cash flow. We currently expect net balance sheet debt to remain in the $5 - $6 billion range. Negative pressure on the rating could develop if financial metrics are weaker than anticipated. For example, if net balance sheet debt were to materially exceed $6 billion at year end 2010, and if for any annual period retained cash flow to net debt were to drop below 25% and net debt to EBITDA were to remain in excess of 2.3x. On a LTM basis for the period ending September 30, 2010 these metrics were 26% and 2.3x respectively. In addition, the current dividend payout in the range of $1.5 billion remains a significant call on cash pressuring Moody's definition of free cash flow.

A portion of DuPont's weaker leverage metrics reflects its large unfunded pension liability, which was $5.6 billion at the end of 2009. DuPont contributed $500 million toward its pension plans in 2010. While this mitigates the liability, it is a significant call on the company's cash. We also look to the prospect of an improvement in asset values over time as a means to mitigate the current impact of this adjustment. Still, the size of this obligation, growing from $1.8 billion at the end of 2007 to $5.3 billion at the end of 2008, doubles the company's adjusted net debt levels. When pension funding gaps push adjusted debt levels above the expectations for the rating, management's commitment and ability to restore financial ratios becomes a rating consideration and pressure on ratings and outlooks may result when financial metrics move too far outside previous expectations or are viewed as unlikely to be restored to levels consistent with the existing rating. However, increased pension liabilities are unlikely to be the sole driver of a ratings downgrade if DuPont has adequate liquidity, sufficient resources to alleviate its funding deficiency, over time, and financial metric contraction is being reversed and moving to levels appropriate for the rating category.

Another area of concern has been whether future earnings growth will be high enough to limit the negative impact from the loss of pharmaceutical royalties in the 2010-2012 time frame; however, the prospect for continued growth in the agricultural business as well as growth in other segments offsets some of this concern. The pharmaceutical royalties have increased over time and in 2009 represented 30% of pretax operating income (PTOI before significant items) versus 22% in 2008. Year-to-date for the nine months ending September 30, 2010 pharmaceutical PTOI was $402 million compared to $790 million in the prior year and represented only 9.5% of 2010 PTOI of $4.2 billion. Moody's assumes pharmaceuticals full year pre-tax income will be about $480 million and will decline markedly in 2011. The decreased income reflects the expiration of certain patents for Cozaar®/Hyzaar®.

DuPont's stable ratings outlook reflects the company's expected ability to weather slower global macroeconomic growth and pursue its cash generating strategies while retaining ample financial flexibility. The stable outlook also reflects Moody's belief that management is not expected to take actions that would increase shareholder returns at the expense of bondholders. Moody's had been concerned that long term weak stock performance could potentially cause management to take actions, such as further large debt funded share repurchases, that would increase shareholder returns and further weaken credit metrics. Moody's expects any future share repurchase programs will be used primarily to offset dilution from benefit programs and will only modestly impact credit measures when cash generated from employee option exercises is considered.

There is no upward ratings potential at this time until credit metrics, particularly cash flow metrics to net debt, increase substantially. To solidly support the current A2 rating we expect to see retained cash flow to net debt to move above 30% and net debt to EBITDA to move below 2.3x on a sustainable basis.

If DuPont's credit metrics are persistently weaker than expected we could review DuPont's ratings with negative implications in light of the then current market conditions and management's ongoing and incremental efforts to bolster cash flow.

Negative pressure on the rating could develop if: 1) shareholder remuneration efforts outpace "financial discipline"; 2) substantial replacement of pharmaceutical cash flows is not maintained; or 3) DuPont's business profile changes significantly as a result of further portfolio dispositions.

Ratings Affirmed

Senior Unsecured Notes - A2

Commercial Paper -- Prime-1

Moody's most recent announcement concerning the ratings for DuPont was on September 20, 2010 when Moody's rated a proposed note offering.

The principal methodology used in rating E.I. du Pont de Nemours and Company was Global Chemical Industry rating methodology published in December 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Headquartered in Wilmington, Delaware, E. I. du Pont de Nemours and Company is one of the largest US chemical companies with a diverse portfolio of specialty materials, chemicals, polymers and agricultural products. The company reported sales of $30.5 billion for the last twelve months ending September 30, 2009 an increase of 17% relative to full year 2009 sales of $26.1 billion.

New York
William Reed
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's changes DuPont's outlook to stable from negative
No Related Data.
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