CHICAGO, May 9 /PRNewswire/ -- Duff & Phelps Credit Rating Co. (DCR) has
reaffirmed the ratings of Owens-Illinois' (NYSE: OI) senior notes at 'BBB-'
(Triple-B-Minus) and convertible preferred stock at 'BB' (Double-B). The
reaffirmation affects approximately $1.7 billion of debt securities. The
Rating Outlook has been revised to Negative from Stable.
The Negative rating Outlook reflects weaker-than-expected operating
results due largely to the extremely weak economic conditions in two of the
company's key growth regions, Latin America and Central Europe. In addition,
interest rate risk due to rising interest rates, higher-than-expected debt
levels as a result of the acceleration of the company's 1999 share repurchase
program and refinancing risk due to substantial bank debt maturing at the end
of 2001 have reduced O-I's financial flexibility.
During 1999, sales and operating income in the company's Latin American
market declined nearly 25 percent and 65 percent over 1998 levels,
respectively, as glass containers were being reused several times more often
than expected due to the severe economic conditions. Weakness in Central
Europe, which was a major contributor to sales and operating income declines
in the company's European division of 9 percent and 33 percent over 1998,
respectively, is attributed to weakness in the Russian economy which led to
over-supply and pricing pressure in the region. While near-term recovery is
unlikely in Central Europe, management expects improving economic conditions
in Latin America (with the exception of Venezuela) during the second half of
2000.
Additionally, O-I has considerable exposure to rising interest rates with
70 percent of outstanding debt at floating rates. Increasing interest expense
due to rising rates as well as a full year of interest expense associated with
the $3.6 billion acquisition of the packaging operations of BTR Packaging in
1998, coupled with the operating weakness in two of the company's key growth
regions, caused coverage ratios to weaken. EBITDA/interest declined to
3.4 times in 1999 from 3.7 times in 1998. Continued operating weakness and
rising interest rates during the first quarter of 2000 caused further decline
in coverage ratios with trailing 12-month EBITDA/interest decreasing to
3.3 times from yearend. While the company expects to refinance a significant
amount of floating-rate debt with fixed-rate debt, market conditions are
currently unfavorable. In addition, O-I will face $4.0 billion of debt
maturities next year in a potentially rising interest rate environment.
As a result of the aforementioned operating weakness, O-I experienced a
deterioration in its share price leading to the acceleration of the company's
10 million share repurchase program at a cost of $226 million, precluding
expected debt reduction during 1999. In addition, due to acquisition spending
and seasonal working capital needs, debt increased slightly in the first
quarter of 2000 to $6.0 billion from approximately $5.8 billion at yearend.
While cash from operations remains adequate to fund the company's substantial
capital expenditure requirements as well as dividends, O-I's financial
flexibility has been reduced at the current rating level. The authorization
of a new 10 million share repurchase program, required working capital
investments and funding related to asbestos settlement activity are likely to
preclude significant debt reduction in 2000.
Positively, the company's domestic and Asia-Pacific glass container
operations continued to post strong results for the full year and the first
quarter. Domestic glass operations benefited from productivity initiatives
while Asia-Pacific operations continue to experience strong demand from the
growing Australian wine export business. In addition, O-I's plastic packaging
segment, which accounted for 31 percent of 1999 revenues, posted sales and
operating income growth from all of the segment's business units. Sales and
operating income increased 19 percent due to a full year of the BTR
acquisition as well as good internal growth.
DCR will base future rating actions on the company's ability to minimize
its exposure to interest rate and refinancing risk as well as reduce debt
through improved cash from operations or the divestiture of non-core assets.
Sizable acquisition spending or an expansion of the share repurchase program
in lieu of debt reduction could lead to a ratings downgrade. However, the
successful refinancing of the company's current debt maturities with a more
balanced fixed/floating rate debt mix as well as the return of a more solid
operating environment in the company's key growth regions could lead to a more
Stable rating Outlook.
SOURCE Duff & Phelps Credit Rating Co.
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Related links:
http://www.dcrco.com
CONTACT:
Steven P. Altman, CPA, 312-368-2090,
altman@dcrco.com, or Marcy C. Odlaug, 312-606-2338,
odlaug@dcrco.com, both of Duff & Phelps Credit Rating Co.
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