Junk auto suppliers, chemical cos. under pressure but oil stable, Moody's says

By Peter Heap

New York, Oct. 3 - Leveraged finance automobile parts suppliers and chemical companies will see additional pressure as a result of the terrorist attacks on Sept. 11 in addition to the negative outlooks they already face, Moody's Investors Service said Wednesday. However the outlook for the high-yield oil sector remains stable.

The key for chemical companies is the drop in end-user demand following the tragedies, Moody's analyst Diane Vargas said in a news release. High yield chemical companies already generally had negative outlooks due to the industry downcycle, the sector's high leverage and weak balance sheets. The outlooks "are more negative now," she added.

Commodity chemical companies are likely to be more affected than specialty chemicals because specialty companies are better able to pass rising costs on to customers, Vargas said.

Higher security and shipping costs will also hurt the chemical sector's profitability.

Auto parts companies face "the extensive ripple effects" of the largest drop in consumer confidence in 11 years, Moody's said. This sector was already facing concern because of rising unemployment and weakening consumer confidence, even before Sept. 11.

"Before the attacks, many auto part suppliers were already only operating at close to break-even levels," said Moody's analyst Lisa Matalon in the news release. "The low-hanging fruit for cutting costs has already been addressed."

Previously, she noted, the auto industry had been heading for its third best sales year ever thanks to low financing costs and promotions.

Now, however, "uncertainty over the nature and extent of the 'war on terrorism' has started to create a domino effect of poor performance," she said.

Unfriendly credit markets are a further negative and Matalon believes any market share gain for the U.S. Big Three automakers from a "buy America" sentiment will likely be "a blip."

By contrast, the oil sector is better prepared.

"Except for those issuers that never fully recovered from that last downturn, the credit position of most leveraged finance oil companies is generally sounder than after the last peak in the pricing," said Moody's analyst Andrew Oram. "Overall, rating outlooks are stable, except for low rated exploration and production companies, which have mostly negative outlooks."

Demand had already been slowing before Sept. 11 and "supply was responding," he said.

Sharp declines in natural gas prices had already prompted exploration and production companies to stop many development projects, Oram added.

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