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Fitch Rates Lubrizol's Senior Unsecured Notes & Term Loan 'BBB'

Published on 2009-01-23. Author : SpecialChem

CHICAGO -- Fitch Ratings has assigned a 'BBB' rating to The Lubrizol Corporation's (Lubrizol) issuance of up to $500 million in senior unsecured notes and $120 million 3-year term loan. Net proceeds from the bond offering are expected to be used to refinance Lubrizol's $382 million 4.625% notes due Oct. 1, 2009 while the term loan will be used to refinance the company's recent acquisition of Dow's Thermoplastic Polyurethane Business (TPU) business. Portions of both offerings may also be used for general corporate purposes.

The Rating Outlook is Stable.

While gross debt will rise meaningfully in line with the latest issuance, increases in net leverage are expected to be moderate as Lubrizol plans to keep cash proceeds from the bond offering at hand until its 2009 notes come due Oct. 1. However, it is worth noting that the timing gap between the $400 million issuance and the redemption of the 2009 notes in October will place additional pressure on Lubrizol's consolidated debt/EBITDA covenant for the first three quarters of 2009 until the refinancing is completed, as debt is calculated on a gross rather than net debt basis. Because of this interim risk, as well as the fact that demand across the chemicals sector has seen a sharp contraction at the end of 2008, we will continue to monitor performance on this covenant closely in 2009. The debt/EBITDA covenant (maximum limit of 3.50 times) is contained in both Lubrizol's USD350 million revolver and its EUR250 million revolver.

Lubrizol's ratings are supported by the company's strong market position within the lubricant additives business, steady free cash flow generation, improving credit metrics, and cumulative debt reductions since the June 2004 acquisition of Noveon International. In December 2008, Lubrizol paid down $200 million in maturing 5.875% notes. More recently, Lubrizol announced that it would be taking a $331 million non-cash goodwill impairment in 2008, primarily related to its Performance Coatings and Engineered Polymer product lines. The impairment is not expected to have an impact on Lubrizol's ratings or Outlook given the fact that it is non-cash in nature, and the company's bonds and revolvers do not contain any net worth or debt-to-capitalization covenants which could be impacted by the writedown.

Lubrizol's performance remained strong over the last twelve months (LTM) period ending Sept. 30, 2008. As calculated by Fitch, EBITDA totaled a record $639.6 million, while cash and equivalents totaled $420.8 million. Liquidity was also strong, as the company had no borrowings across its main U.S. and Euro-based revolvers over the same period. Debt/EBITDA was 2.25 times (x), while interest coverage was 7.70x. Increased working capital requirements negatively impacted Lubrizol's free cash flow, which was -$38.6 million at Sept. 30, 2008 versus $213.6 million in 2007. However, Lubrizol's strong market position in lubricant additives (it is the largest single seller of lubricant additives in a market with only four major providers) results in substantial pricing power and should translate into an ability to pass on costs fairly rapidly to downstream customers relative to other chemical names. The recent sharp reversal in North American crude oil costs should also speed relief on the working capital front. Other concerns for bondholders center on acquisition risk. The share repurchase program has currently been suspended.

Lubrizol is a specialty chemicals producer based in Wickliffe, Ohio. The company operates manufacturing and research facilities in 27 countries and had a total employee count of 6,900 as of year-end 2007. Lubrizol's two main business segments are Additives and Advanced Materials. The Additives segment product portfolio includes additives for engine oils, automatic transmission fluids, hydraulic lubricants, industrial gear oils and greases. The Advanced Materials segment product portfolio includes Noveon Consumer Specialties, Performance Coatings, and Engineered Polymers. For the LTM period ending June 30, 2008, Lubrizol earned approximately $634 million of operating EBITDA on sales of nearly $4.83 billion.

Source: Fitch Ratings

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