TEXT-S&P revises Owens-Illinois outlook to stable from negative

Thu Sep 27, 2012 1:14pm EDT

Overview
     -- Credit measures for Owens-Illinois Inc. have maintained an improving 
trend, and the company is committed to further debt reduction. 
     -- We are revising our outlook to stable from negative and affirming all 
existing ratings, including our 'BB+' corporate credit rating.
     -- The stable outlook reflects our view that gradually improving 
operating results and continued debt reduction will support improved credit 
measures.  

Rating Action

On Sept. 27, 2012, Standard & Poor's Ratings Services revised its outlook on 
Perrysburg, Ohio-based-Owens-Illinois Inc. to stable from negative. At the 
same time, we affirmed all existing ratings on the company, including our 
'BB+' corporate credit rating.

Rationale

The outlook revision reflects Owens-Illinois' improved earnings in the first 
half of 2012, and ongoing debt reduction. Credit measures have improved over 
the past year, with funds from operations (FFO)-to-total adjusted debt near 
19% at June 30, 2012, compared with 15% at June 30, 2011. We expect 
FFO-to-total adjusted debt to continue to gradually improve in 2013. The 
company expects earnings in the second half of 2012 to be affected by 
challenging economic conditions in Europe. However, expected free cash 
generation remains solid at $250 million in 2012, which it will use to reduce 
debt. While challenging economic conditions in Europe remain a concern, the 
company's earnings and cash flow protection measures should benefit from 
demand growth in South America and Asia and relatively flat to slightly 
improving volumes in North America.   

Standard & Poor's Ratings Services' ratings on Owens-Illinois reflect the 
company's "satisfactory" business risk profile and "significant" financial 
risk profile. With annual sales of $7.4 billion, Owens-Illinois is the world's 
largest manufacturer of glass containers, with leading market positions in 
most regions. In 2011, 74% of its sales were outside of North America. The 
company produces a wide array of glass containers for beer, liquor, wine, 
food, tea, fruit juices, and other nonalcoholic beverages. 

Credit quality benefits from the company's long-standing relationships with 
food and beverage customers, and it has annual or multiyear supply contracts 
with many of them. Glass remains the packaging of choice for popular upscale 
iced teas, beers, wines, and certain beverages and foods that rely on its 
superior marketing image and preservative qualities (by keeping out oxygen). 

Earnings for first six months of 2012 improved over the prior year as higher 
pricing offset the impact of cost inflation, and enhanced manufacturing and 
supply chain performance offset the impact of sales volume declines. 
Specifically, shipments of glass containers declined by 6% in the second 
quarter of 2012, compared with the same  period in 2011, driven mainly by 
lower wine bottle sales in Southern Europe. In 2011, operating earnings were 
adversely affected by inflation of energy and other costs outpacing selling 
price increases, production and supply chain issues in North America, and a 
significant drop in Australian volumes for wine and beer. 

We expect Owens-Illinois' volumes to gradually improve in 2013, and price 
increases will offset raw material (mainly soda ash) and energy costs 
inflation. EBITDA margins have improved to 18% from 16% in 2011, and pretax 
return on capital is about 12%. During the past few years, Owens-Illinois has 
lowered its costs by shutting down excess capacity and amending contract terms 
to hasten the pass-through of energy cost changes in North America. 

Continued debt reduction should support further improvement to the company's 
credit measures. The key FFO-to-total adjusted debt ratio was about 19% as of 
June 30, 2012, and near our target range of 20% to 25% for the current 
ratings. As of June 30, 2012, total adjusted debt was about $5.7 billion. (We 
adjust debt to include $864 million representing our estimate of post-tax 
asbestos-related liabilities during the next 10 years, $684 million in 
post-tax underfunded postretirement liabilities, and $167 million in 
capitalized operating leases.) 

The company's asbestos-related liabilities, which stem from a business it 
exited in 1958, represent a moderate ongoing risk factor. Owens-Illinois' 
reserve for future asbestos-related costs reflects its estimated liability for 
approximately three years. The company expects to conduct an annual review of 
its asbestos-related liabilities and costs, and it anticipates that extending 
its estimation period by one year (to maintain a three-year estimated 
liability) each year will result in an annual charge. The reserve totaled $471 
million as of year-end 2011. The number of pending asbestos-related lawsuits 
has been declining during the past few years. Asbestos-related cash payments 
have also been declining but remain substantial ($170 million in 2011, with 
the company expecting $165 million in 2012). 

Liquidity
 
We regard Owens-Illinois' liquidity as "adequate." As of June 20, 2012, the 
company had $336 million of cash and $807 million of availability under its 
$900 million revolving credit facility maturing in 2016. In addition, the 
company has a EUR280 million European accounts receivable securitization program
maturing in September 2016 subject to annual renewal of backup credit lines.

Our liquidity assessment incorporates the following expectations and 
observations:
     -- We expect the company's sources of liquidity, including cash and 
facility availability, to exceed its uses by more than 1.2x during the next 12 
months.
     -- We expect net sources to remain positive, even in the event that 
EBITDA declines by up to 20%.
     -- We expect the company to maintain an EBITDA cushion of more than 15% 
under the leverage covenant in its credit facility.
     -- We expect asbestos-related outlays, which totaled $170 million in 
2011, to continue declining slightly in future years.
     -- Management currently expects capital expenditures to total $350 
million in 2012. 
     -- Debt maturities are moderate, with $76 million due in 2012, $129 
million in 2013, and $206 million in 2014. 
 
Financial covenants include a maximum leverage covenant of 4x, and the actual 
ratio was 2.8x as of June 30, 2012.

Recovery analysis
 
For the complete recovery analysis, see Standard & Poor's recovery report on 
Owens-Illinois to be published shortly after this article. 

Outlook

The outlook is stable. Credit measures have improved near appropriate levels, 
and we believe that management's actions to improve operating efficiency and 
continued focus on debt reduction should offset weak demand trends in Europe. 
We believe that financial policies are prudent and that management remains 
committed to lowering debt leverage, such that FFO-to-total adjusted debt can 
be sustained in the appropriate 20% to 25% range.

We could lower the ratings slightly if credit metrics deteriorated such that 
FFO-to-total adjusted debt declined to or below 15% with no prospects for 
recovery. Based on our scenario forecasts, this could occur if the company is 
unable to pass on higher costs to customers in a timely fashion or if economic 
weakness materially depresses demand. This could cause volume to decline and 
EBITDA margins to decline below 16%. We could also lower the ratings if the 
company pursues debt-financed acquisitions, which cause deterioration in 
credit measures. 

While not expected at this time, we could raise the ratings if improved 
earnings and debt reduction resulted in FFO-to-total adjusted debt improve to 
30% on a sustained basis. 

Related Criteria And Research

     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
Sept. 18, 2012
     -- Key Credit Factors: Methodology And Assumptions On Risks In The 
Packaging Industry, Dec. 4, 2008
 
Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
                             To                 From
Owens-Illinois Inc.
Owens Illinois Group Inc.
 Corporate Credit Rating     BB+/Stable/--      BB+/Negative/--


Ratings Affirmed

Owens-Illinois Inc.
 Senior Unsecured           BB-                
  Recovery rating           6

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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