TEXT-S&P affirms Ashland Inc 'BB' corporate credit rating

Thu Aug 2, 2012 1:14pm EDT

Overview
     -- Diversified chemical manufacturer Ashland Inc. plans to issue
$500 million of senior unsecured notes for refinancing.
     -- We are assigning a 'BB-' issue rating and '5' recovery rating to these 
notes.
     -- We are affirming our 'BB' corporate credit rating, as well as our 
senior unsecured and subordinated debt ratings on Ashland.
     -- We are raising our senior secured debt rating on the company by one 
notch to 'BB+' with a recovery rating of '2'.
     -- The stable outlook reflects our expectation that credit measures, 
though improving, will remain in a range appropriate for the current ratings 
during the next year.

Rating Action

On Aug. 2, 2012, Standard & Poor's Ratings Services assigned its 'BB-' senior 
unsecured debt rating and a '5' recovery rating to Ashland Inc.'s proposed 
offering of $500 million of senior unsecured notes due 2022. The '5' recovery 
rating indicates our expectation of modest (10%-30%) recovery in the event of 
a payment default. Ashland plans to use the proceeds of this offering and cash 
on hand to fund its tender offer for its $650 million secured 9-1/8% notes due 
2017.

At the same time, we affirmed our 'BB' corporate credit rating on Ashland. We 
also affirmed our 'BB-' senior unsecured debt and 'B+' subordinated debt 
ratings on the company.

Based on our updated recovery analysis, we are raising our senior secured debt 
rating on Ashland to 'BB+' from 'BB' and revising the recovery rating to '2' 
from '3'. These actions reflect the significant reduction in the amount of 
senior secured debt outstanding following the proposed refinancing. The '2' 
recovery rating indicates our expectation of substantial (70%-90%) recovery in 
the event of a payment default. The outlook is stable.

Rationale

The proposed refinancing, if successful, will significantly lower Ashland's 
borrowing costs and will extend debt maturities. In addition, because Ashland 
plans to use cash to repay part of the outstanding notes, the transaction will 
result in a modest reduction in the amount of total debt outstanding. Pro 
forma for the transaction, total adjusted debt will be about $5.2 billion. We 
adjust debt to include about $1.6 billion of tax-effected postretirement, 
asbestos, and environmental liabilities, as well as operating lease and other 
debt-like obligations. Pro forma total adjusted debt to EBITDA is in the upper 
3x area.

Standard & Poor's Ratings Services' ratings on Ashland Inc. reflect its 
assessment of the company's business risk profile as "satisfactory" and its 
financial risk profile as "aggressive."

Covington, Ky.-based Ashland is a diversified chemicals company that has 
transformed and improved its business mix through a number of major 
acquisitions and divestitures during the past several years. These include the 
acquisition of International Specialty Products Inc. (ISP) and the divestiture 
of the chemical distribution business in 2011. Ashland's increasing specialty 
chemicals orientation should result in higher and more stable operating 
profitability.

Ashland's businesses consist of:
     -- Specialty ingredients: Manufactures water-soluble and film-forming 
polymers used in food, pharmaceutical, personal care, and various industrial 
applications;
     -- Consumer markets: Produces and markets premium-branded automotive 
lubricants and chemicals under the Valvoline brand, as well as operates and 
franchises quick-lube service centers;
     -- Water technologies: Provides chemicals to pulp and paper producers, 
industrial companies, and municipalities. Products improve operational 
efficiency, enhance product quality, protect plant assets, and minimize 
environmental impact; and
     -- Performance materials: Makes composite resins, specialty adhesives, 
and elastomers used in construction, transportation, packaging, and marine 
applications.

Overall EBITDA margins rose to near 18% during the quarter ended June 2012, 
but vary widely by business. Specialty ingredients, with upper-20% EBITDA 
margins, is the largest contributor to earnings (representing nearly 60% of 
total EBITDA). Ashland's other segments have much lower EBITDA margins that 
currently range from about 9%-13%. Recent results are benefiting from the 
stabilization of raw material costs and steps taken to rationalize capacity 
and increase operating rates. Most of the businesses are performing well in 
the face of challenging macroeconomic conditions. The water technologies 
business remains below expectations. As a result, Ashland is working to 
increase sales volumes while maintaining price discipline, as well as to 
reduce operating costs.

In the current fiscal year, discretionary cash flow was negatively affected 
first by higher working capital at the acquired ISP operations and then by 
elevated guar inventories. Future cash generation should benefit from lower 
interest expense following the planned refinancing and the company's focus on 
working capital reduction. Although recent legislation may ease pension 
funding requirements, annual contributions could remain close to the 2012 
level of $160 million. We expect Ashland to apply discretionary cash flow 
primarily to debt reduction as it did following the large, mostly 
debt-financed acquisition of Hercules Inc. in 2008. Management is targeting 
unadjusted debt to EBITDA of about 2x (which is equivalent to the low-3x area 
after Standard & Poor's adjustments). However, bolt-on acquisitions and a 
modest amount of share repurchases are also possible. During the next year, we 
expect funds from operations (FFO) to debt to remain in the 15%-20% range we 
consider appropriate for the rating.

Liquidity

We regard Ashland's liquidity as "adequate" as defined in our criteria. As of 
June 30, 2012, the company had $597 million of cash and $905 million of unused 
availability under its $1 billion revolving credit facility maturing in 2016. 
The company is comfortably in compliance with financial covenants. However, we 
expect the EBITDA cushion to decline somewhat as the covenants tighten over 
time.

Key assumptions and observations of our liquidity analysis include the 
following:
     -- We expect capital spending to gradually increase from the 
approximately $300 million that management expects this year. We estimate 
annual maintenance capital spending at slightly more than $200 million;
     -- Outlays for combined asbestos and environmental matters are likely to 
remain below $100 million per year;
     -- Annual pension funding requirements could remain near this year's 
level of about $160 million; 
     -- Dividends are likely to increase only moderately from about $72 
million per year at the current rate and share count; and
     -- Scheduled debt maturities are manageable--between $140 million and 
$180 million annually through 2015. 

We therefore conclude:
     -- Sources of cash, including FFO, unused credit availability, and cash 
on hand, will exceed uses by more than 1.2x during the next 12 to 18 months;
     -- Sources are likely to exceed uses even if EBITDA drops by 15%;
     -- The company should be able to absorb low-probability, high-impact 
events with limited need for refinancing; and 
     -- The company has prudent financial risk management and a satisfactory 
standing in credit markets.

Recovery analysis

We rate Ashland's senior secured debt 'BB+' (one notch above the corporate 
credit rating) with a '2' recovery rating. The '2' recovery rating reflects 
our view that lenders would experience substantial (70%-90%) recovery in the 
event of a payment default. We rate the company's senior unsecured debt 'BB-' 
(one notch below the corporate credit rating) with a recovery rating of '5', 
indicating the likelihood of modest (10%-30%) recovery. We rate its 
subordinated debt 'B+' (two notches below the corporate credit rating) with a 
recovery rating of '6', reflecting the likelihood of negligible (0%-10%) 
recovery. For the complete recovery analysis, see our recovery report on 
Ashland to be published on RatingsDirect.

Outlook

The outlook is stable. The acquisition of ISP enhanced Ashland's business risk 
profile through the addition of a substantial, high-margin specialty chemicals 
business and should reduce earnings cyclicality. We expect the proposed 
refinancing to result in a substantial reduction in interest expense. This 
should increase discretionary cash flow, which we expect the company to apply 
primarily to debt reduction until it reaches management's target debt to 
EBITDA ratio of about 2x (low-3x area after Standard & Poor's adjustments). 
Thereafter, we expect the company to use excess cash for bolt-on acquisitions 
and potentially higher shareholder rewards. Until debt reduction is more 
significant, we expect credit metrics to remain in a range appropriate for the 
current ratings, including FFO to debt of 15%-20%. 

We could raise the ratings slightly if earnings and cash flow strengthen, and 
the company continues to reduce debt, resulting in FFO to debt of more than 
20% and debt to EBITDA of about 3x. We think this could occur if revenue 
increases 7.5% from expected 2012 levels, the company achieves and maintains 
18.5% EBITDA margins, it reduces debt by another few hundred million dollars, 
and other debt-like liabilities remain unchanged.

Although we view it as unlikely, we would lower the ratings if FFO to debt 
dropped to less than 12% without clear prospects for recovery. Our projections 
indicate that this could happen if revenues were flat and EBITDA margins 
declined to about 13%.

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011 
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009 
     -- Key Credit Factors: Business And Financial Risks In The Commodity And 
Specialty Chemical Industry, Nov. 20, 2008

Ratings List
Ratings Affirmed

Ashland Inc.
Hercules Inc.
 Corporate credit rating                BB/Stable/--       

Ashland Inc.
 Senior unsecured                       BB-                
 Recovery rating                        5

Hercules Inc.
 Subordinated                           B+                 
 Recovery rating                        6

New Rating

Ashland Inc.
 $500 million 
senior unsecured notes due 2022          BB-                
 Recovery rating                         5                  

Rating Raised
                                        To                 From
Ashland Inc.
 Senior secured                         BB+                BB
 Recovery rating                        2                  3