Extra Debt Weighs On O-I; Reduction Lifts Building Materials

Fitch Ratings has downgraded Owens-Illinois' bank debt ratings from BB- to B+ due to the company's proposed $1.5 billion acquisition of BSN Glasspack. Fitch notes that the acquisition is likely to heighten Owens-Illinois' debt load with about $1.5 billion in additional debt and an expected leverage multiple of 4.7 times. Owens-Illinois will use a "C" loan to add to the firm's existing $1.9 billion in credit facilities. Deutsche Bank, Bank of America, Citibank and Scotia Capital are among the senior lenders (LMW, 2/23).

Owens-Illinois is pressured by adverse factors affecting the company's cash flow including $80-100 million in incremental interest expenses, heavy capital expenditure of approximately $100 million annually and asbestos related payments. In addition, Owens-Illinois' consolidated operating margins have been negatively impacted by a 34% drop in plastics, lower glass volumes due to adverse weather, lower pension income and higher energy costs.

Fitch notes that management projections of $1 billion in after-tax proceeds for the planned sale of its plastics business will be difficult to achieve in the current environment. Fitch also believes that Owens-Illinois will have to complete all the synergies expected under the merged companies to reach its anticipated $100 million in incremental free cash flow. Jeffrey Denker, Owens-Illinois' treasurer, did not return calls.

* Building Materials Corp. of America's senior secured debt, including its $350 million credit facility, was upgraded by Standard & Poor's to B+ from B due to greater-than-anticipated debt reduction. S&P notes that Building Materials is in a position to extend its debt reduction efforts with total debt-to-EBITDA in the near term expected to be 3.5 times.

Also supporting the credit are factors such as Building Materials' position as a significant U.S. producer of residential asphalt roofing materials, its meaningful free operating cash generation and satisfactory liquidity, and favorable trends in the residential markets. The ratings do incorporate the company's narrow product line, the competitive industry and its vulnerability to petroleum-based raw material costs, including the price of asphalt. But S&P also notes that the company's competitive position should be sustained by its strong brands, customer service, product mix improvement, and effective national distribution capability. Calls to John Rebele, senior v.p. and cfo, were not returned by press time.