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Rating Action:

Moody's rates Nalco's notes at Ba2 -- CFR raised to Ba2

08 Dec 2010

Outlook stable

New York, December 08, 2010 -- Moody's Investors Service assigned a rating of Ba2 to Nalco Company's (Nalco) proposed $1.0 billion in notes due 2019. Nalco Finance Holdings LLC's Corporate Family Rating (CFR) was raised to Ba2 from Ba3 (see list of rating actions below). Proceeds from the notes will be used for general corporate purposes, which we assume will include repayment and refinancing of all or a portion of existing subordinated debt and holding company discount notes. The outlook for the ratings is stable.

RATINGS RATIONALE

"The Ba2 CFR rating incorporates our view that debt reduction along with margin increases will aid in improving credit metrics to levels supporting the rating over the next two years" said Moody's analyst Bill Reed. "In addition this timely refinancing combined with earlier maturity extensions of term loans is a credit positive and improves liquidity."

Nalco's Ba2 CFR reflects the prospect of continued strong cash flow generation combined with balance sheet debt reduction over the next two years. The ratings are further supported by Nalco's entrenched competitive position as a global supplier of water treatment and process chemicals for industrial and institutional applications that generates strong EBITDA margins (roughly 19% for the LTM ended September 30, 2010). Additional positives include the diversity of its end-markets, raw materials and customer base, modest capital expenditure requirements, and the improvement in its operating performance over the past year despite a weak economic environment. The ratings incorporate the strength of the management team and significant barriers to entry, including high customer switching costs, patents, significant R&D spending, and long-term customer relationships.

The Ba2 CFR rating is restrained nevertheless by the elevated debt levels that limit the company's ability to handle any exogenous event that would have a negative impact on its financial performance. Even with the improved credit metrics debt to EBITDA remains high at a projected 4.2 times at the end of 2010 down from 5.6 times at the end of 2009. Balance sheet debt has decreased over the last three years moving from $3.3 billion at the end of 2007 to $2.9 billion at the end of September 2010. In light of the high level of debt, Moody's reiterates that it is critical that Nalco generate at least $125 million of annual free cash flow (cash from operations less capital expenditures and dividends) to support further debt reduction which Moody's projects may approach $400 million over the next two years.

New Proposed Ratings

Nalco Company

Guaranteed senior unsecured notes, $1,000 million due 2019 -- Ba2 LGD4 60%

Ratings raised

Nalco Finance Holdings LLC

Corporate Family Rating to Ba2 from Ba3

Probability of Default Rating to Ba2 from Ba3

Senior discount notes, $461 million due 2014 to B1 LGD6 97% from B2 LGD6 93%*

Nalco Company

Guaranteed senior subordinated notes, US dollar/Euro notes due 2013 to B1 LGD6 97% from B2 LGD5 82%*

*Ratings to be withdrawn upon completion of refinancing or debt extinguishments

Ratings affirmed

Nalco Company

Guaranteed senior secured revolver, $250 million due 2014 -- Ba1 LGD3 37% from LGD2 26%

Guaranteed senior secured term loan C, $274 million due 2016 -- Ba1 LGD3 37% from LGD2 26%

Guaranteed senior secured term loan C1, $100 million due 2016 -- Ba1 LGD3 37% from LGD2 26%

Guaranteed senior secured term loan B, $650 million due 2017 -- Ba1 LGD3 37% from LGD2 26%

Guaranteed senior unsecured notes $491 million due 2017 -- Ba2 LGD4 60% from LGD3 42%

Nalco's liquidity profile is good, reflecting strong operating cash flows, cash balances at the end of September 2010 of $175 million and a $250 million unused revolver facility due 2014. At the end of September 2010 the company had $18 million of undrawn but outstanding standby letters of credit under the revolver. The refinancing of Nalco's bank facilities with extended multi-year maturities is viewed as a positive for the credit profile and liquidity. The senior secured credit facilities are unconditionally guaranteed by Nalco Holdings LLC, and certain domestic subsidiaries of Nalco. The repayment of these facilities is secured by substantially all the assets of Nalco and the guarantors, including, but not limited to, a pledge of their capital stock and 65% of the capital stock of each non-U.S. subsidiary owned by the guarantors. The company was in compliance on its covenants with adequate headroom at the end of September 2010.

Additional liquidity is provided by a three-year receivables facility due June 2013 that provides up to $150 million in funding from a commercial paper conduit, based on availability of eligible receivables and satisfaction of other customary conditions. Of the $143.3 million available for borrowing based on the amount of receivables eligible for financing as of August 31, 2010, Nalco had $126.0 million of outstanding borrowings at September 30, 2010.

The stable outlook reflects Moody's expectation that Nalco will not increase debt nor pursue any significant acquisitions and that credit metrics will improve in the medium term. The outlook also reflects our anticipation that Nalco will continue to maintain its market share in key end-markets and successfully avoid aggressive price competition with its major competitors. The ratings could be lowered if the company further increases debt, announces a significant acquisition within the near-term, fails to achieve yearly free cash flow of at least $125 million adjusted for extraordinary items during the next two years, or if competitive pressures are greater than anticipated. Moody's could raise the company's CFR over the next two years if debt were reduced by some $500 million and RCF/Debt were to be above 18% on a sustainable basis.

Moody's most recent announcement concerning the ratings for Nalco was on May 5, 2009, when new credit facilities were rated.

The principal methodology used in this rating Nalco was Moody's Global Chemical Industry rating methodology published in December 2009.

Nalco Company, headquartered in Naperville, Illinois, is a global producer of water treatment and process chemicals for industrial and institutional applications. Revenues were $4.1 billion for LTM period ending September 30, 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's rates Nalco's notes at Ba2 -- CFR raised to Ba2
No Related Data.
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