-- 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
-- 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.
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
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.
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
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
Ashland's businesses consist of:
-- Specialty ingredients: Manufactures water-soluble and film-forming
polymers used in food, pharmaceutical, personal care, and various industrial
-- 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
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.
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
Key assumptions and observations of our liquidity analysis include the
-- 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.
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.
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
Corporate credit rating BB/Stable/--
Senior unsecured BB-
Recovery rating 5
Recovery rating 6
senior unsecured notes due 2022 BB-
Recovery rating 5
Senior secured BB+ BB
Recovery rating 2 3