Moody's cuts Rhodia debt, outlook negative

Moody's Investors Service lowered the senior unsecured and senior subordinated debt ratings for Rhodia S.A. to B2 (previously: Ba2) and B3 (previously: Ba3), respectively. The outlook is negative.

The rating action reflects the very weak financial profile of the group and the expectation that debt protection metrics will remain weak; the challenges Moody's foresees as the group intends to generate at least €700 million in disposal proceeds as it expects to execute fully valued disposals over the next 12 months (averaging 7x EBITDA) in a still depressed environment for the chemicals industry.

Moody's rating action also reflects its concerns about the rapid deterioration in operating performance and cash flow generation of the group during 2003 and the ratings agency's expectations that this operating performance and debt protection metrics will remain weak (albeit improving moderately) during 2004.

"While we recognize that Rhodia has been particularly hit by the current cyclical downturn, high raw material prices, and adverse exchange rate movements, we also believe that part of the portfolio is suffering from structural challenges, including particularly its pharmaceutical product activities (exposed to overcapacities and a weak Pharma pipeline) as well as its Polyamide business (hit by a growing move of the textile and fiber industries to low-cost regions of the world)," the agency said.

Over the next 12-18 months, while Moody's said it would expect to see a gradual improvement in operating performance and cash flow generation of the group to coincide with an expected upturn in European and global GDP growth rates, Moody's does not believe that the group will be able to return to the profit margin levels achieved in the late nineties.

Additionally, cash flow will be initially burdened by high restructuring charges associated with new cost-saving programs which Moody's does, however, expect to bear fruit (especially the program targeting selling, general and administrative savings) over the medium term.

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