Fitch Rts Pennzoil-Quaker State's New Sr Unsec Nts `BB-`; Rtg Outlk Neg

    NEW YORK--Oct. 19, 2001--Fitch has rated Pennzoil-Quaker State Company's (Pennzoil) expected $250 million senior unsecured note issue `BB-`. The company's existing senior notes, which will become secured, maintain `BB+` ratings. The company's new $350 million secured bank revolver, which will rank pari passu with the existing senior notes, is rated `BB+'. The Rating Outlook is changed to Negative from Stable. Proceeds from the new senior unsecured offering will be used to repay outstanding bank debt.
    Fitch anticipates that Pennzoil's credit profile will remain weak given higher operating costs for Pennzoil, lower volumes in the lubricants and consumer products segment, and increased debt levels. Despite the weaker credit profile, the additional security given to the existing senior noteholders and new bank lenders is a significant benefit and is reflected in the above secured ratings. The level of subordinated debt included in the capital structure also enhances the secured note holders' positions. Security includes all U.S. intangible assets, inventory, and accounts receivables not sold in the securitization program.
    Pennzoil-Quaker State maintains a leading 36% market share in passenger car motor oil represented by its Pennzoil and Quaker State brands. In addition, the company markets leading automotive consumer products and has significant fast oil change operations with over 2,100 Jiffy Lube service centers in the U.S. However, operating margins have been under pressure as base oil, Pennzoil's largest raw material component, has significantly increased in price over the past 22 months. Pennzoil has implemented 6 price increases over the same period in order to recoup these higher costs however, a time lag exists between when costs to Pennzoil increase and when Pennzoil can implement price increases. Despite the price increases and the company's successful restructuring program, which is expected to generate annual savings of $200 million in 2001, Pennzoil's cost base will remain high and continue to place pressure on margins. In addition, volume levels have been negatively impacted by Pennzoil's increased prices to consumers as well as by higher gasoline prices, which results in fewer miles driven and reduces the frequency of oil changes. While Pennzoil has been working to drive volume through greater channel penetration and a broadened product portfolio, volumes remain below historical levels.
    Pennzoil's total debt will be higher than previously expected given lower motor oil volumes and reduced proceeds from asset sales during fiscal 2001. On June 30, 2001 total debt was $1.2 billion including $236 million in bank debt. The expected new secured bank revolver will extend the company's maturities beyond the December 2001 expiration of the existing bank agreement, which has a 1-year term out option. For the twelve month's ended June 30, 2001 leverage, measured by total debt to EBITDA, was 5.4 times (x) and EBITDA coverage of interest was 2.3x. The weak operating performance and continued high debt levels have resulted in a negative rating outlook for the company.
    Uncertainty surrounding the longer-term impact of the events of September 11 on crude, base oil, and gasoline prices has been heightened. Consumer behavior toward automobile travel, maintenance, and spending are critical factors that Fitch will continue to monitor.