Standard & Poor's has placed Tesoro Petroleum's $1.225 billion in credit facilities on watch with negative implications after the company announced a 15% decrease in predicted production levels at its six refineries through the end of September. "The margins are down, and now volumes are down as well," said S&P analystJohn Thieroff. That could translate into diminishing cash flow, he noted, predicting that progressively limited cash flow could increase Tesoro's chances of violating its interest coverage covenant at the end of the third quarter.
Tesoro, which is rated BB, began to lose its financial grip after financing acquisitions in late 2001 and early 2002 with 85% debt, Thieroff noted, citing a $677 million purchase from BP Amoco last fall and a $1.08 billion acquisition from Valero Energy this past May. Despite Tesoro's $50 million cash balance and a $250 million cushion from its revolver, rising inventory prices on crude oil compounded with feeble crack spreads--margins that compare crude oil and refined oil prices--could quickly wipe out the company's liquidity, he said.
The San Antonio company, with total outstanding debt of about $2 billion, is aiming to slash some of its debt by the end of 2003 through $500 million in asset sales, reduced capital spending and cost reductions. Tesoro recently announced plans to sell its midwestern pipeline system for $110 million to Williams Energy Partners. Calls to Tesoro were not returned.
* Moody's Investors Service has downgraded Alpharma's $790 million credit facility from B1 to B2. The decline reflects the Fort Lee, N.J., pharmaceutical company's lower-than-expected operating earnings, concerns over an adequate infrastructure and uncertain profitability from expandable global operations. Inspections by the Food and Drug Administration also loom over the company's Baltimore facility, threatening $175 million of Alpharma's $1.2 billion in total pro-forma sales.
Moody's further estimated that Alpharma's credit facility may not be secured by enough collateral to cover its $950 million in debt. The facility is secured by all of the company's assets and those of its U.S. subsidiaries, along with 100% of the stock of its U.S. subsidiaries and 65% of the stock of its foreign subsidiaries.
On the upside, Moody's did credit Alpharma with a diversified position in the generic and branded markets, as well as steady product development with seven new launches to date. Calls to Alpharma were not returned.
* Moody's has upgraded Solutia's secured credit facility from B1 to Ba3, following a downgrade in July. The upgrade reflects Solutia's two-year extension of its $600 million credit facility, as well as the receipt of $190 million from a senior note offering this past June. Initial concerns over Solutia's ability to refinance its pre-existing facility triggered Moody's alarm (LMW, 7/22).
Because the new facility gives the banks greater access to unrestricted assets and other U.S. assets, the collateral sufficiently exceeds the credit's value. With the upgrade, Moody's also anticipates that the company's business improvements should keep Solutia's cash flow positive through 2003, at which time its cash flow should increase enough to pay off debt quicker.
Still, concerns linger over the St. Louis, Mo., company's potential liability in relation to recent contamination problems at its Anniston, Ala., site. This threat, along with the chemical product maker's success in renegotiating its credit facility again in the next 12-18 months, will likely affect Moody's future assessments.