Fitch Downgrades Pennzoil-Quaker State's Ratings
6 September 2000
Fitch Downgrades Pennzoil-Quaker State's Ratings
CHICAGO--Sept. 5, 2000--Fitch downgrades Pennzoil-Quaker State Company's senior unsecured debt to 'BBB-' from 'BBB', and commercial paper to 'F3' from 'F2'. Fitch has also changed its Credit Outlook from Negative to Stable. Approximately $1.1 billion of debt is affected by this rating action.The rating downgrades reflect slower than expected improvement in the company's financial profile and its highly leveraged position. In addition, significant improvement in credit protection measures is not expected as Pennzoil-Quaker State's operating environment remains challenging and the company continues to pursue potential acquisitions.
High commodity prices have placed pressure on Pennzoil-Quaker State's profitability. While the company has been able to achieve better than expected savings following its 1998 combination of the Pennzoil Company's automotive, consumer products and services business with the Quaker State Corporation, expense reduction and price increases have not offset high raw material costs in the period. As a result, EBITDA margin declined to 8.1% for the latest 12 months ended June 30, 2000, from 8.4% in fiscal 1999. In addition, Pennzoil-Quaker State maintains a highly leveraged position with total debt at June 30, 2000, totaling $1.2 billion. For the 12 months ended June 30, 2000, leverage, measured as total debt-to-EBITDA, increased to 4.8 times(x) from 4.4x in fiscal 1999 and EBITDA coverage of interest weakened to 2.9x from 3.1x over the same period.
While announced asset sales in the company's base oil and specialty products operations are expected to generate between $150 million and $200 million, a significant portion of these proceeds may to be used to fund future acquisition activity. Credit protection measures may improve from current levels as low margin businesses are divested, additional cost savings are achieved and a portion of the sale proceeds are applied toward debt reduction. However, this improvement maybe moderated by continued high raw material cost and possible acquisition spending.