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Rating Action:

Moody's upgrades Ashland to Ba1

04 Oct 2019

New York, October 04, 2019 -- Moody's Investors Service ("Moody's") upgraded the Corporate Family Rating (CFR) of Ashland LLC to Ba1 from Ba2 and the Probability of Default Rating to Ba1-PD from Ba2-PD. Ratings on the senior unsecured notes and the junior subordinated legacy debt at its Hercules Incorporated subsidiary were also upgraded to Ba1 and B1, respectively, from Ba3 and B2, maintaining the 3 notch differential to the CFR on the Hercules bonds. The senior secured bank credit facility rating at Ashland LLC is affirmed at Ba1, anticipating the change to unsecured status of this revolver. The upgrades reflect the specialty repositioning of the portfolio, which has been ongoing for a while but benefited significantly with the recent divestiture of the composites business and the Marl butanediol (BDO) plant in Germany. The upgrades also reflect the reduction in debt and leverage from the use of proceeds; adjusted gross leverage is expected to be in the mid-3.0 times range for the year ending September 2019. The Speculative Grade Liquidity rating is maintained at SGL-2. The outlook on the ratings is stable.

"The ongoing portfolio restructuring and transition to a virtual pure-play in specialty chemicals has strengthened Ashland's portfolio and enhanced its strong margins with the pro forma EBITDA margins of roughly 23%," according to Joseph Princiotta, SVP at Moody's. "Key end markets such as personal care, pharma, nutrition & other, and Pharmachem tend to be stable businesses and are likely to be relatively resilient against business cycles or recessions," Princiotta added.

Upgrades:

..Issuer: Ashland LLC

.... Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, Upgraded to Ba1 from Ba2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 (LGD4) from Ba3 (LGD5)

..Issuer: Hercules Incorporated

....Junior Subordinated Regular Bond/Debenture, Upgraded to B1 (LGD6) from B2 (LGD6)

Affirmations:

..Issuer: Ashland LLC

....Senior Secured Bank Credit Facility, affirmed at Ba1 (LGD4) from (LGD2)

Outlook Actions:

..Issuer: Ashland LLC

....Outlook, Remains Stable

..Issuer: Hercules Incorporated

....Outlook, Remains Stable

RATING RATIONALE

Ashland's credit profile is supported by a portfolio of specialty chemical businesses serving diverse end markets in the U.S. and internationally, a modest revenue base with pro forma LTM revenues of $2.4 billion (pro forma for the sale of composites and the Marl plant), meaningful market shares in key businesses (#1 globally in Specialty Ingredients) and good geographic and operational diversity.

In September, Ashland closed on the divestiture of its Composites business and the Marl BDO facility to Ineos Group Holdings S.A. (Ba2 stable) for $1.015 billion and used approximately $900 million in proceeds to reduce secured debt and balance sheet leverage. The company is targeting gross balance sheet leverage at or below 2.5x (or about 2.9x on a Moody's-adjusted basis), notwithstanding occasional but modest deviation from this target to support opportunistic M&A activity that might occur.

Negative factors in the credit include the modest scale and diversity of the downsized portfolio and the legacy contingent liabilities associated with asbestos litigation. However, asbestos risk was largely contained with the 2015 settlement. As of June 30. 2019, Ashland had an insurance receivable of $179 million and restricted trust investments totaled $329 million, while reserves for asbestos liabilities amounted to $617 million.

Assuming the lower end of the FY 2019 EBITDA guidance range, we project gross adjusted leverage in the mid-3.0x range by year end with an improving metric trend expected in 2020. Cash flow metrics are stronger with Retained Cash Flow to Debt in the mid 20% range. Moody's expects that Ashland will continue to enjoy strong margins in the Specialty Ingredients segment, with cost reductions, mix management and new products supporting further margin improvement from roughly 23% to 25-27%; while maintaining a strong balance sheet and generating positive free cash flow for dividends, share buybacks and modest M&A activity.

Ashland's SGL-2 Speculative Grade Liquidity rating reflects its good liquidity position, which is supported by $132 million in cash balances at June 30, 2019, availability of $661 million as of June 30, 2019 on the existing $800 million senior secured revolver ($49 million for LOC and $90 million outstanding), $12 million of availability on its two accounts receivable securitization facilities ($214 million outstanding), and expectations for modest positive free cash flow generation. The revolver is expected to be amended to unsecured; our current LGD analysis and ratings anticipate this change.

The stable outlook assumes the company sustains or improves EBITDA margins and avoids large debt-funded M&A or share buybacks that increase leverage. Occasional modest M&A activity that temporarily and modestly spikes leverage would be consistent with the stable outlook.

To be considered for an upgrade, the company would need to commit to policies that support an IG rating over time: sustaining gross leverage in the mid-to-high 2x range (on a Moody's adjusted basis), and Retained Cash Flow/Debt above 25%, while the portfolio realizes healthy organic growth and the company pursues a growth plan that does not include large debt-financed acquisitions. The ratings could be downgraded if adjusted gross leverage were to be sustained above 3.5x and retained cash flow to debt declines below 15%, resulting from M&A activity, earnings pressure or debt-funded share buybacks.

ESG considerations and risks are modest for Ashland, and even more so than most in the specialty chemical space given its predominant use of natural-based resources including cellulosic, plant-derived and other natural raw materials. However, the asbestos liability associated with legacy boiler and pipe materials from past acquired companies stands out in the environmental and social profile, despite its long tail and trust and insurance funded status.

Ashland LLC (Ashland), headquartered in Covington, Kentucky, is focused on growing its specialty chemicals businesses globally. The divestiture of the Composites segment and the Marl BDO facility leaves one relatively large segment -- Ashland Specialty Ingredients (ASI) -- and one much smaller I & S segment. Revenues are geographically diverse with roughly 40% derived from North America, 33% from Europe, 19% from Asia and the balance from South America and Other. Pro forma for the divestiture, Ashland's revenues are roughly $2.4 billion.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Joseph Princiotta
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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