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17 Mar 2010
New York, March 17, 2010 -- Moody's Investors Service upgraded Ashland Inc.'s (Ashland)
Corporate Family Rating (CFR) to Ba1 from Ba2 reflecting expectations
for a continued economic recovery, improvement in Ashland's
end market demand and credit metrics supportive of the rating.
Additionally, the company's liquidity and cost of financing
is expected to benefit from a proposed refinancing of its revolving credit
facility and term loans that will leave the company with a $500
million revolver due 2014, a $300 million Term Loan A due
2014 and a $350 million accounts receivable securitization program.
Ashland's profitability has benefited from cost cutting initiatives,
strong margins in certain businesses and the ability to raise prices to
offset raw material price increases despite a difficult demand environment.
As of the end of the December 2009 quarter, the company had achieved
run rate savings of $405 million per year, exceeding its
cost savings target. Elevated margins for the Consumer Markets
(Valvoline) business have resulted in strong EBITDA generation.
While we expect margins in this business to contract, they could
stay elevated compared to historical norms as a result of the company
continuing to have success in passing through base oil raw material cost
increases to its customers.
Both Functional Ingredients and Water Technologies have proved to be less
affected by the global economic downturn than typical cyclical chemicals
businesses. We expect that continued growth in demand in line with
our expectations for a modest economic recovery in North America and Europe
are supportive of the upgrade. While volumes have not improved
in all of Ashland's businesses, visibility of future demand
has improved as have general business conditions. The strong positive
cash flow generation since the Hercules acquisition has allowed Ashland
to repay over $1 billion of balance sheet debt; however,
we note that Ashland's underfunded pension liability has increased by
approximately $550 million.
The Ba1 CFR reflects Ashland's good credit metrics, moderate leverage
for its rating category, diversified portfolio of chemicals businesses,
large size with a diversified customer base in the US and internationally,
meaningful market shares in certain businesses (e.g.,
Water Technologies, Aqualon Functional Ingredients), and operational
and geographic diversity. We expect that Ashland will maintain
its conservative stance. Ashland has indicated that it intends
to focus on expanding its specialty chemicals businesses and global earnings,
which, if achieved, will further smooth its earnings base
and increase margins.
The CFR also reflects significant asbestos-related litigation and
environmental liabilities from both the Ashland legacy businesses and
the Hercules businesses. Ashland's low historical EBITDA margins
(partly a function of its large distribution business), volatile
raw material costs and inconsistent free cash flow generation have also
constrained the rating.
Before further upgrades to the ratings, we would expect improvement
in demand for Ashland's products as well as a recovery in its Performance
Materials segment such that the core specialty chemicals segments provides
a larger proportion of earnings. We note that Consumer Markets
(Valvoline), a non-core business, has accounted for
over one-third of the firm's EBITDA over the last twelve
months. This business has been performing at high profitability
levels not realized previously and EBITDA margins are expected to contract.
Ashland has continued to maintain good liquidity, supported by cash
and cash equivalents of $406 million, $282 million
of unused availability under its $400 million revolving credit
facility due 2013 (as of December 31, 2009) and expectations for
positive free cash flow over the next 12-18 months. Additionally,
Ashland had $173 million available under the $200 million
accounts receivable securitization program expiring November 3,
2010. This program will be upsized to $350 million as part
of the proposed financing. The company also had $142 million
par value of illiquid auction rate securities classified as non current
assets (carried on Ashland's books at $126 million), that
might be a source of liquidity in the future. The company is expected
to maintain good liquidity despite the potential for investments in specialty
chemicals businesses either through capex for growth projects or modest
bolt-on acquisitions. The company has a significant cushion
under its leverage covenant as a result of the reducing balance sheet
debt by over $1 billion since the Hercules Incorporated acquisition
and is expected to easily remain in compliance with its financial covenants
over the next twelve to eighteen months.
The rating actions are summarized below.
Corporate Family Rating -- Ba1 (from Ba2)
Probability of Default Rating- Ba1 (from Ba2)
Senior Unsecured Medium-Term Note Program, Ba2 (from Ba3)
7.72% Senior Unsecured Medium Term Notes due 07/15/2013,
Ba2 (LGD4, 66%) from Ba3 (LGD4, 67%)
8.38% Senior Unsecured Medium Term Notes due 04/01/2015,
Ba2 (LGD4, 66%) from Ba3 (LGD4, 67%)
8.8% Senior Unsecured Debentures due 11/15/2012, Ba2
(LGD4, 66%) from Ba3 (LGD4, 67%)
$400mm sr sec revolving credit facility due 2013, Baa3 (LGD2,
20%) from Ba1 (LGD2, 23%)
$400mm sr sec term loan A due 2013, Baa3 (LGD2, 20%)
from Ba1 (LGD2, 23%)
$850mm sr sec term loan B due 2015, Baa3 (LGD2, 20%)
from Ba1 (LGD2, 23%)
$650mm Senior Unsecured Notes due 2017, Ba2 (LGD4,
66%) from Ba3 (LGD4, 67%)
6.60% Notes due 2027, Baa3 (LGD2, 20%)
from Ba1 (LGD2, 23%)
6.50% Jr sub debentures due 2029, Ba2 (LGD6,
94%) from B1 (LGD6 94%)
Ratings outlook: Stable
The ratings on the existing term loans and the $400 million revolver
will be withdrawn following the proposed refinancing. We would
expect to upgrade the ratings on all of the rated debt instruments by
one notch, with the exception of the 6.50% junior
subordinated debentures due 2029 (which will continue to have a Ba2 rating)
following the proposed refinancing as a result of Ashland's capital structure
having less senior secured debt.
Moody's most recent rating action for Ashland was on November 24,
2009, when the outlook was moved to stable from positive and its
debt ratings were affirmed.
The principal methodology used in rating Ashland was Moody's Global Chemical
Industry rating methodology, published in December 2009 and available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
Ashland, headquartered in Covington, Kentucky, is a
manufacturer of specialty chemicals (with a focus on performance materials
and water technologies), a distributor of chemicals and plastics,
and, through its Valvoline brand, a marketer of premium-branded
automotive and commercial lubricants. On November 13, 2008,
Ashland acquired Hercules, a leading global supplier of specialty
chemicals and related services for the paper, paint, consumer
products, construction materials and energy markets, in a
transaction valued at $3.4 billion. Ashland had revenue
of $8.2 billion for the twelve months ended December 31,
2009 ($2.9 billion of revenue was from its distribution
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Moody's upgrades Ashland's CFR to Ba1; outlook is stable
Corporate Finance Group
Moody's Investors Service
No Related Data.
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