Rating Actions & Outlooks
February 3, 2010
Moody's Downgrades Air Products
Moody's downgraded the ratings of Air Products and Chemicals Inc.'s senior unsecured ratings to A3 from A2 and its short-term ratings for commercial paper to Prime-2 from Prime-1.
Additionally, Moody's placed the ratings of Airgas Inc. under review, with direction uncertain. The review of both companies' debt was prompted by Air Products unsolicited all cash offer to acquire Airgas for $60 a share, for a transaction valued at roughly $7 billion.
Air Products has obtained a bridge facility sufficient to complete the transaction but has not disclosed its long term financing plans. This proposed transaction is subject to both shareholder and US regulatory approvals.
The downgrade of Air Products' ratings reflects that this transaction represents a shift in strategic and financial policies at Air Products as indicated by the size of the proposed transaction.
Also, Air Products' weak positioning in the A2 rating category due to the recent economic downturn, combined with continued high levels of capital spending, which will limit meaningful free cash flow generation and the significant cost and management time required to successfully execute a hostile takeover of Airgas, also contributed to the downgrade.
Air Products and Chemicals, headquartered in Allentown, Pa., is a leading manufacturer and supplier of industrial, medical and specialty gases and related equipment. Air Products had sales of $8.2 billion in the LTM ending Dec. 31, 2009.
Airgas Inc., headquartered in Radnor, Pa., is the largest independent distributor of industrial, medical and specialty gases and related equipment in North America. Airgas reported $4.2 billion in revenue for the LTM ending Dec. 31, 2009.
Moody's Outlook On OneBeacon Is Negative
Moody's confirmed the A2 insurance financial strength, or IFS, ratings of the OneBeacon Insurance Group inter-company pool members and the Baa2 senior debt rating of its intermediate holding company, OneBeacon U.S. Holdings Inc. following the company's announcement that it plans to sell its standard personal lines business to Tower Group Inc. for approximately $180 million.
The outlook on the ratings is negative.
Moody's said the rating confirmation was based on the group's narrowed strategic focus on niche, low-to-moderate hazard specialty business segments where profitability has been strong in recent years.
The announced personal lines sale represents OneBeacon's second transaction in two months. In December 2009, the company sold -- via renewal rights agreement -- its non-specialty commercial lines business.
Moody's recognizes that the company continues to be an active manager of its capital. The company's adjusted financial leverage is at the high end of rating agency’s expectations for the ratings. In addition, OneBeacon will also need to continue to commit capital to legacy liabilities, particularly, risk of adverse development on the run-off of its commercial lines portfolio as well legacy asbestos and environmental reserves.
"The resolution of the negative outlook will depend on the company's management of its risk adjusted capitalization and the level of credit support in its capital structure," said Moody’s.
OneBeacon Insurance Group, Ltd. is a Bermuda-domiciled insurance holding company whose property and casualty insurance subsidiaries provide a range of specialty insurance products in the U.S.
Fitch Cuts Ratings Of Pacific LifeCorp
Fitch downgraded by one notch the ratings assigned to Pacific LifeCorp and certain subsidiaries, including Pacific Life Insurance Co., which is PLC's primary life insurance subsidiary.
The rating action reflects the company's higher-than-expected earnings and capital volatility, weaker earnings profile going forward which will pressure organic capital generation, increased financial leverage across the enterprise and reduced financial flexibility. The rating action also reflects continued deterioration in the commercial real estate market which could result in higher-than-expected losses for PLC.
The company's relatively large variable annuity exposure has resulted in higher-than-expected statutory and GAAP earnings volatility over the past two years. Over the near term, Fitch expects PLC's earnings to moderate relative to historical levels but be less volatile due to increased hedging.
In addition to commercial real estate-related investments, Fitch is also concerned about future investment losses resulting from the company's exposure to Prime and Alt-A residential mortgage backed securities and hybrid securities. PLC's gross unrealized loss position relating to these asset classes was $1.2 billion as of Sept. 30, the majority of which are aged over one year. Total gross unrealized losses on fixed maturities were $1.7 billion.
Moody's Confirms Denbury's Ratings With A Negative Outlook
Moody's confirmed the ratings for Denbury Resources Inc., but the rating agency has a negative outlook on the company.
“The confirmation of Denbury's Ba3 CFR considers the company's scale when combined with Encore's assets, the additional enhanced oil recovery prospects, the increased exposure to oil, the plan to fund its 2010 capital program from cash flow and asset sales, and plans for near-term debt reduction through asset sales," said Moody's.
"However, the negative outlook reflects the increase in pro forma leverage which places it at the high end for the Ba3 peer group. Although the company has plans to reduce debt through asset sales, the exact timing and amount of proceeds is uncertain at this time," the rating agency said.
Denbury Resources Inc. is headquartered in Plano, Texas.
Moody's Outlook On Kraft Revised To Negative
Moody's confirmed the Baa2 long-term rating and the Prime-2 short-term rating of Kraft Foods Inc. ("Kraft") following the company's announcement that it has acquired control of Cadbury plc.
The rating outlook was revised to negative.
Kraft's Baa2 rating is supported by its global market presence, leading category market shares, and its broadly diversified portfolio of branded packaged food products—strengths that will be enhanced by the addition of Cadbury's strong franchise brands, access to fast-growing developing markets such as India and Brazil, and significant clout in the global confectionary business.
These strengths are offset by elevated financial leverage that will result from the Cadbury acquisition, material integration risks, and a history of aggressive financial policy at Kraft that has led to rating downgrades in the past, and has kept credit metrics outside the typical bounds for its rating category.
"The negative outlook reflects the risk that Kraft will not quickly reduce its financial leverage given its history of unfavorable shifts in financial policy," said Moody's. In order to maintain its Baa2 rating, Kraft will need to sustain a disciplined and far more conservative financial policy over the next 18-24 months. This would include devoting the vast majority of its discretionary cash flow to debt reduction. "If Kraft returns to share repurchase activity or leveraged acquisitions before it has fully restored its credit metrics, a downgrade would likely occur."
Kraft Foods Inc., Northfield, Ill., is one of the largest food companies in the world with over $40 billion in sales. London's Cadbury is one of the world's largest confectionery groups, holding a share of around 10% of global market sales in US dollar terms through its presence in three categories.
Moody's Changes Valero's Outlook To Negative
Moody's changed Valero Energy Corp.'s rating outlook to negative from stable.
The move to a negative outlook reflects the ratings risk if, over the next 12 months, down-cycle weakness fails to recover sufficiently to be compatible with Valero's leverage and ratings.
If it appears that second and third quarter 2010 margins, which are normally strong with the summer driving season, will instead be comparable to last year's weak second and third quarter margins, the ratings may be placed under review for downgrade. Other items that would be a drag on the current ratings would be negative free cash flow and rising debt levels. At this point, if the ratings do require adjustment, we believe that our long term view of the refining sector would support continued investment grade Valero ratings.
Valero Energy is based in San Antonio. It is the largest most diversified independent refiner in the U.S.
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