Moody's rates EVC senior notes B3

Moody's Investors Service assigned a B3 rating for the proposed €160 million in senior notes due 2011 to be issued by EVC International NV through its Ineos Vinyls Finance plc unit and a B1 rating to the €124.2 million in senior secured facilities at EVC International. The outlook is stable.

Moody's B1 senior implied rating reflects (i) financial risks from EVC's relatively highly leveraged capital structure with a pro forma net debt/adjusted EBITDA of 3.5x as of Sept. 30 and no expected de-leveraging in the next 12 to 18 months; (ii) the historically weak operating and financial performance of the group, which has been loss making in the last five years; and (iii) the company's product concentration in polyvinyl chloride, which is highly cyclical.

The ratings also reflect (iv) the low growth rates of PVC in Europe, which represents 95% of the group's total turnover; (v) the raw material price volatility and the negative impact this can have on margins as ethylene and chlorine follow cycles that may be different from the PVC cycle and (vi) some environmental concerns and related costs, which could pressure margins.

The ratings, however, recognize: (i) EVC's leading European position in PVC resin with a 20% market share in what is largely a regional market; (ii) Ineos' 86.4% ownership and commitment to EVC, its largest cash investment to date as well as the synergy benefits from the integration with Ineos Chlor and relationship with other Ineos companies which should help lower EVC's overheads and raw material costs.

The rating also reflects (iii) the strong management team with a proven track record at Ineos plc, Lucite International (B1 senior implied rating) and at EVC for the last two years (EVC's fixed costs have been reduced by around €45 million since Ineos management took over in March 2001); (iv) the higher margins and growth rates of the film business, especially in the pharma/smart cards business and (v) the presence of a number of strong barriers to entry.

EVC's historical financial and operating performance weakly positions the ratings in their category. Moody's stable outlook, however, reflects the expectation that EVC's cash flow profile will improve, leading to a strengthening of the rating, in light of the recent demand upturn in the PVC market and the company's ongoing cost savings efforts.

EVC will also benefit from the lack of new capacity in the sector following limited investments made in the last two years. Any deterioration in PVC market conditions and failure to deliver anticipated cost savings would likely lead to a review of the ratings.

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