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19 May 2009
Avery's commercial paper ratings remain at P-2
New York, May 19, 2009 -- Moody's Investors Service lowered the senior unsecured debt ratings
of Avery Dennison Corporation (Avery) to Baa2 from Baa1. Moody's
also affirmed Avery's short-term rating for commercial paper
at Prime-2. This concludes the rating review of Avery that
was initiated in January of 2009 after Avery reported significant declines
in their fourth quarter performance. The outlook for the ratings
Avery's ratings were lowered to Baa2 as the company is expected
to continue, over the intermediate term, to face negative
margin pressure resulting from a combination of raw material cost inflation
and declining sales volumes across most businesses units. We expect
that this combined pressure will result in cash flows and credit metrics
that, in the short term, are more consistent with a rating
in the high end of the Ba category, hence the negative outlook.
The outlook also reflects Avery's recent preliminary non-cash
goodwill impairment charge of $820 million for the retail information
services business unit that served to initially reduce Avery's balance
sheet goodwill account by over 47%.
The Baa2 rating is nevertheless supported by Avery's relatively
stable historic business profile and the prospect for improvement in credit
metrics as the global economy gradually recovers in the 2010-2011
time frame. The Baa2 rating is further sustained by management's
efforts at reducing absolute debt levels and instituting cost saving and
restructuring programs designed to improve and generate cash flow.
We view both the exchange of 75% of the HiMEDS into equity and
the recent bank amendments as distinct credit positives; however,
the need to take these actions is due to business declines that have resulted
in credit metrics that no longer support the Baa1 rating.
- Senior unsecured guaranteed notes due 2017 -- to Baa2 from
Avery Dennison Corporation
- Medium term notes -- to Baa2 from Baa1
- Senior unsecured notes -- to Baa2 from Baa1
Commercial Paper of Prime-2
Avery was able to generate over $170 million in free cash flow
in 2008. Avery Dennison is a global leader in pressure sensitive
adhesives, labels and other industrial marking systems. These
markets traditionally exhibit more stable demand than most other industrial
markets although they are currently experiencing continued soft end user
demand and inventory destocking that caused first quarter sales to decline
more than 14%. The slowdown impacted every business segment,
as well as in every geographic region. Price increases and productivity,
while positive factors, were not able to offset the impact of lower
volumes, causing operating margins to fall. Still starting
in 2010 these markets are expected to demonstrate improved demand growth
over the next several years. Moreover, we believe that diversity
in customers and end-market applications also have traditionally
provided solid stability to revenues and gross cash flow.
Moody's most recent announcement concerning the ratings for Avery
was on January 30, 2009. At this time the Baa1 senior unsecured
debt ratings of Avery were placed under review for possible downgrade
and Avery's P-2 commercial paper ratings were affirmed.
The principal methodology used in rating Avery Dennison was Moody's
Global Chemical Industry rating methodology, which can be found
at www.moodys.com in the Credit Policy & Methodologies
directory, in the Ratings Methodologies subdirectory (February,
2006, document #96180). Other methodologies and factors
that may have been considered in the process of rating these issuers can
also be found in the Credit Policy & Methodologies directory.
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. The company reported sales of $6.5 billion
for the LTM period ending April 4, 2009.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Moody's lowers Avery Dennison's ratings to Baa2
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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