Moody's Investors Service has assigned a B1 rating to the $4.5 billion in bank facilities for Toledo, Ohio-based Owens-Illinois, Inc.'s subsidiaries. Christophe Razaire, v.p. senior credit officer for Moody's, said, "The lenders have pretty good collateral coverage, substantially covering the loan." The loan rating is therefore one notch higher than the senior implied rating, which has been downgraded based on the likelihood that free cash flow available for debt repayment will remain thin over the medium term. Future deterioration of free cash flow arising from payments over asbestos litigation could place further pressure on the ratings.
The specter of asbestos litigation is a continuing threat--the company has been settling claims since the 1970s, and in 2000 payments increased to $180 million, driven in part by a strategy of offering accelerated claims processing in exchange for favorable settlement--but according to Razaire, "operating performance is more important than asbestos. Compare asbestos payments to EBITDA, it is a lot, but compared to free cash flow it is less significant."
Performance has been affected by weakening emerging markets, especially in Latin America, where demand for glass containers has diminished, and there has been an increased reliance on refillable glass containers, stated Razaire. Higher energy and raw material costs have also led to margin deterioration, and though the company should pass many of these extra costs onto customers, it can only do so with a renewal of customer supply agreements, he said.
There are plus sides to support the ratings. This is one of the biggest companies in the world for glass production. In a competitive environment, Owens-Illinois has built strong market positions and high margins, by focusing on cost reduction initiatives and developing a strong technological edge, Razaire noted. It has also taken advantage of the rising use of glass as a packaging material for beer: the microbreweries started the trend, that has spilled over into mainstream brands, driven by consumer tastes. A lot of beer users are happier drinking out of a glass bottle. There is no plastic envisioned in this area for the foreseeable future, but if this were to happen Owens-Illinois would be fine, he added, "as the firm has diversified into plastics."