Moody's cuts Lyondell, Equistar ratings

Moody's Investors Service said it has downgraded the ratings of Lyondell Chemical Co., including the secured credit facility and senior secured debt to B1 from Ba3. The outlook is stable.

Concurrently, Moody's also downgraded the ratings of Equistar Chemicals L.P., including its secured credit facility to Ba3 from Ba2 and senior unsecured notes and debentures to B2 from B1. The ratings remain under review pending the completion of its financing activities.

The downgrade of Lyondell's debt reflects Moody's opinion that financial performance in 2004 will be weaker than previously anticipated, the expectation that meaningful debt reduction will not begin until mid-2005 and that de-leveraging over the next several years will be less than previously envisioned.

Furthermore, Moody's said the ratings reflect a prolonged trough in propylene oxide, a weak outlook for MTBE, the delay in the recovery of financial performance at Equistar, exposure to volatility in petrochemical feedstock prices, uncertainty over the continuing dividend stream from Lyondell-CITGO Refining L.P. (LCR) and a large cash dividend.

Lyondell's rating is supported by an unusually large cash balance, the expectation that financial performance will improve in 2004, management's consistent commitment to ultimately reduce debt, and the company's willingness and ability to access the equity markets to maintain its liquidity.

Moody's said the downgrade of Equistar's credit ratings reflects the company's weak financial profile due to an extended industry trough and the expectation that the company will not generate substantial levels of free cash flow until 2005.

Moreover, Equistar's position as a majority owned subsidiary of Lyondell, and the lack of any substantial covenants in its bank agreements or bond indentures that prevents dividends to its owners, effectively limits the company's ratings.

Furthermore, Moody's said it believes that the vast majority of Equistar's free cash flow will be distributed to its owners and not used for debt reduction over the intermediate-term.

The B1 rating is supported by Equistar's position as a leading North American supplier of olefins, polyolefins and derivatives, as well as the company's high degree of feedstock flexibility, which is critically important now that natural gas prices are anticipated to remain near or above $5/million BTU.

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