Owens-Illinois slates changes, deleveraging to be a focus, targets 3 times leverage ratio by 2018

By Paul Deckelman

New York, Dec. 10 – Change is coming to Owens-Illinois Group, Inc.

One high-profile change being made at the giant Perrysburg, Ohio-based manufacturer of glass bottles and containers for the food and beverage industries will take effect on Jan. 1, when longtime chief executive officer Al Stroucken will end his 10-year tenure at the top, handing the reins of the company to Andres Lopez, a 29-year O-I veteran who currently serves as chief operating officer. Stroucken will stay on in his other position, as chairman of the board, until the annual shareholder’s meeting in May of 2016.

The CEO-elect outlined some of the plans he has for the company at the Bank of America Merrill Lynch Paper, Packaging and Builders conference on Thursday in Boston.

One of his key plans involves chopping down O-I’s mountain of balance-sheet debt.

“Deleveraging this company as fast as we can will be an area of focus,” Lopez promised.

Acquisition boosts debt load

According to its most recent 10-Q filing with the Securities and Exchange Commission, covering the 2015 third quarter ended Sept. 30, as of the end of that period, Owens-Illinois was carrying total debt of $5.857 billion – well up from the $3.445 billion on the books at the end of fiscal 2014 on Dec. 31 of that year, and from the $3.214 billion of debt that it had at the end of the year-earlier third quarter.

The latest-quarter debt consisted of $5.607 billion of long-term debt, plus an additional $250 million of short-term loans and the portion of long-term debt payable within the year.

The company’s debt ballooned upward earlier in the year, when it lined up some $2.25 billion of new bank loans and bonds to finance its all-cash acquisition of Mexican glass manufacturer Vitro, SAB de CV’s glass food and beverage container business. That transaction, valued at some $2.15 billion, closed on Sept. 1.

As part of the financing, O-I’s wholly owned Owens-Brockway Glass Container Inc. subsidiary visited the junk bond market, pricing a quickly shopped $1 billion two-part transaction on Aug. 11. The bond issue consisted of $700 million of 5 7/8% senior notes due 2023, which priced at 99.219 to yield 6%, and $300 million of 6 3/8% senior notes due 2025, which priced at par.

When the company announced its plans for financing the Vitro acquisition in mid-May – when both the high yield market and the bank loan market were stronger – it projected that the new debt would carry a blended interest rate of about 4%, based on expectations for a roughly 2% rate on the planned term loans and a roughly 5% rate on the planned bonds.

In presentation materials prepared for use in conjunction with Lopez’s appearance at the BAML conference and available on the company website, Owens-Illinois slightly modified its prior projections, noting that the Vitro-related debt’s blended interest rate actually came in around 4.2%

It also projected that post-transaction, its total leverage would be debt at about 3.9 times trailing 12-month adjusted EBITDA, while net leverage would be about 3.8 times. The company’s lending covenants allow for a maximum leverage ratio of 4.5 times for the four quarters following the acquisition.

The company said it expects to use the strong free cash flow of the combined business to reduce its leverage following the transaction, aiming at a goal of around 3 times by 2018, versus current levels around 4 times.

The presentation slides noted that part of the company’s debt-management strategy involved the repayment earlier in the year of its then-outstanding $594 million of 7 3/8% notes due 2016. The last $300 million of the $600 million of the notes that had originally been issued in 2009 were redeemed on May 19 at a make-whole price of 50 basis points over Treasuries plus accrued interest.

Deleverage before cash return

During the question-and-answer portion of the session following his formal presentation, a participant asked Lopez about the timeframe for Owens-Illinois’ previously stated plans to return more of its free cash flow to shareholders.

He answered that “our capital allocation will remain within the guidance we’ve given before. Our priority has got to be deleveraging.”

Lopez explained that “we’ve got to run this business with an ‘owner mentality.’ What that means to me is the return has got to be what we work for. Every decision I make has to maximize the return, that’s the point.”

He continued that “we’re going to be working more and more down those lines. We’re going to work on deleveraging, and as we do that, we’ll have better chances to change the capital allocation guidance.”

The company’s recently appointed senior vice president and chief strategy and integration officer John Haudrich added that “post- the transaction, buying out the Vitro food and beverage [container] business, the leverage ratio is just a touch over 4 times, and our goal is to get it down to 3 times by 2018.

“And so the strategy in that is substantially focusing our near-to-medium cash flow to debt reduction. And then as we look to the tail end of that window, or mid-point in that window, share repurchases or other forms of shareholder investment returns would be entertained.”

© 2015 Prospect News.
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