Solutia withdraws $100 million mandatory convertible on downgrade to junk by Moody's

By Ronda Fears

Nashville, Tenn., Feb. 4 - Solutia Inc. withdrew its proposed $100 million mandatory convertible offering after Moody's downgraded the company into junk territory, to Ba1 from Baa3. The company said the heavily weighted equity component of the mandatory offering no longer fits its financing strategy and it would pursue alternate financing plans. The issue had been delayed last week to wait for Moody's to announce its rating, but sources close to the situation said the company was shocked at the downgrade. A call to the company was not returned.

St. Louis-based Solutia, a chemicals manufacturing firm, had planned to use proceeds for the partial repayment of outstanding borrowings under its $800 million revolving credit facility because it was securitized and then issue straight debt that was unsecured, so the mandatory helped with its balance sheet structure.

Moody's said the downgrade reflects the company's high debt level and limited ability to improve its credit profile in the current economic environment. Solutia's debt remains well above anticipated levels due to the weak economic environment and limited ability to sell non-core assets subsequent to the Vianova acquisition in 1999 and two smaller acquisitions in 2000, Moody's said, noting that the recently announced sale of Solutia's 50% interest in its AES joint venture and the prospect for substantially lower feedstock costs throughout 2002, should modestly improve the credit profile.

Solutia's credit facility was modified in December to grant banks security in working capital and domestic assets as well as guarantees from international subsidiaries, Moody's noted, and currently has roughly $500 million outstanding under this facility. However, Moody's believes that it will take Solutia a year or two to return debt protection measurements to levels that would fully support an investment grade rating. Solutia's rating outlook is stable, Moody's said, due to the belief that the company will remain cash flow positive in 2002.

If the company can significantly increase free cash flow and reduce debt below $900 million, Moody's said it would reconsider the appropriateness of an investment grade rating. In the unlikely event that debt would rise above $1.5 billion in the near-term, Moody's said it may consider further negative rating actions.

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