Fitch, the international rating agency, has placed the ratings of Owens Corning on Rating Watch Negative following the company“s announcement that further charges would be taken related to the compan…
Fitch, the international rating agency, has placed the ratings of Owens Corning on Rating Watch Negative following the company“s announcement that further charges would be taken related to the company“s asbestos liabilities. Ratings under review are the company“s senior unsecured rating of BBB- and the MIPS rating of BB+. The rating review will focus on the increase in the company“s fixed-payment obligations in 2003 and beyond, and whether the company“s cash flow provides sufficient coverage through the cycle to cover debt service obligations at the investment-grade level. The new reserve, forecast at US$ 700 million to US$ 1 billion before tax, will not affect cash outflows associated with asbestos liabilities through 2002. Payments during this period are subject to caps, which have been reaffirmed through recent agreements under the National Settlement Program (NSP). Required payments (prior to insurance proceeds and tax benefits) are scheduled to fall rapidly from approximately US$ 950 million in 2000 to US$ 400 million in 2001 and US$ 250 million in 2002. The new reserves will result in an increase in expected payments from US$ 150 in 2003 and 2004, to approximately US$ 400 million each year. The existing rating incorporated the assumption that, despite the meaningful increase in debt resulting from payments in 1999 and 2000, the subsequent rapid falloff would prevent the company“s balance sheet from further deteriorating in the event of normal cyclical fluctuations. The rating also assumes that Owens Corning would be in a position to restore its balance sheet upon a continuation of existing healthy market conditions, or in the event of an upturn in economic conditions following any slowdown in the short term. However, by increasing claims on the company“s cash flow in 2003 and 2004, the higher fixed cost obligations reduce the company“s flexibility to absorb cyclical fluctuations. Weak economic conditions during this period could result in further increases in debt, or prevent reductions from levels that would be considered high for the rating. Owens Corning has also sold or joint-ventured assets to absorb the increased level of payments associated with the NSP, reducing the cash flow capacity of the firm. The announcement also stated that Owens Corning has received US$ 335 million under non-product liability insurance policies, of which only US$ 125 million had been booked as a receivable. The company estimates that several hundred million more in similar proceeds (not currently recognized on the company“s books) may be available under the same legal context. Fitch will be considering the effect of the receipt of this US$ 335 million versus the US$ 500 million in higher outflows in the 2003 and 2004 period. Other factors that will be analysed include the potential for further reserves at Owens Corning, reserves associated with the Fibreboard settlement trust, proceeds from tobacco litigation and additional insurance proceeds. Fitch will be meeting with Owens Corning management in the next several weeks to review the current rating. The downrating by Fitch follows similar moves by other rating agencies, such as Moody“s and Standard & Poor“s. Standard & Poor“s lowered its ratings on Owens Corning and placed them on CreditWatch with negative implications, while Moody“s Investors Service placed the debt ratings of Owens Corning on review for possible downgrade. Previously, Owens Corning had predicted weaker second quarter operating results. It said it expected to post a second quarter loss resulting from the US$ 700 million to US$ 1 billion asbestos liability charge, and that operating results would fall due to slack demand and higher costs. Preliminary net sales for the second quarter were expected to be below the US$ 1.3 billion reported last year, while operating income was expected to be US$ 1.00 a share, excluding the charge, compared to US$ 1.31 a year ago. The company said its lowered outlook reflects weaker demand in its roofing, siding and insulation businesses as the housing market responds to the rise in interest rates. Also, it said, its energy and raw materials costs have increased.