Fitch Revises Nalco's Rating Outlook to Positive; Affs IDR at 'B'

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has taken rating action on Nalco Company (Nalco) as follows: Fitch affirms the following: --Issuer Default Rating (IDR) at 'B'; --Senior secured credit facility at 'BB/RR1'; --Senior secured term loans at 'BB/RR1'; --Senior unsecured debt at 'BB/RR1'. At the same time Fitch upgrades Nalco's senior subordinated notes to 'BB-/RR2' from 'B-/RR5'. Fitch also affirms the IDR of 'B' for Nalco Finance Holdings (Nalco Finance), and upgrades the senior discount notes to 'B-/RR5' from 'CCC+/RR6'. The Rating Outlook for both Nalco and Nalco Finance is revised to Positive from Stable. The Positive Rating Outlook reflects the improvement in Nalco's businesses and the strengthening of the economies around the world. Margins have improved slightly in 2006 and 2007 despite higher raw material, energy and transportation costs. Fitch expects margins to improve as price increases continue to take effect and as the market fundamentals strengthen. Fitch remains moderately concerned about increasing energy costs and the overall effect of high raw material prices on demand. However, with water becoming a scarce commodity in some parts of the globe, it is expected that water treatment and water treatment products will likely see a major increase in demand in the coming years. The upgrade of the senior subordinated notes at Nalco and the senior discount notes at Nalco Finance is a result of the increased enterprise value due to improvement in EBITDA over the past several quarters. This increased enterprise value provides for a higher recovery value for all classes of debt. The subordinated notes are expected to have a recovery of 74% or 'RR2' and the senior discount notes are expected to have a recovery of 11% or 'RR5'. Fitch's recovery ratings (RR) incorporate an evaluation using a distressed EBITDA and a derived multiple reflecting scorecard characteristics for the company and industry; the going concern value remains higher than the asset liquidation value. Recovery prospects for Nalco's senior secured revolving credit facility, senior secured term loan and senior unsecured notes continue to be outstanding according to Fitch's Recovery Ratings Scale at 'RR1'. The 'RR1' reflects the very high principal recovery expected for the senior secured credit facilities and unsecured notes. Recovery prospects for Nalco's senior subordinated notes are rated superior and recovery prospects for senior discount notes at Nalco Finance continue to be below average recovery at 11% or 'RR5'. As of June 30, 2007, Nalco's balance sheet debt plus accounts receivable (A/R) program balance totaled $3.208 billion. Based on Fitch's calculations Nalco had a total debt-to-Operating EBITDA of 4.6 times (x) including the senior discount notes for the latest 12 months (LTM) ending June 30, 2007. Operating EBITDA to gross interest incurred was 2.50x for the same period. Balance sheet debt consists of $958.3 million in senior secured term loans, $962.9 million in senior unsecured notes, $735.1 million in senior subordinated notes and $402.8 million in senior discount notes. In addition, the company's $160 million A/R program had a balance of $148.8 million June 30, 2007. Nalco has a modest maturity schedule, with approximately $6 million due for the remainder of 2007 and $58 million due in 2008 as of June 30, 2007. Nalco is expected to have the financial flexibility to repay and/or replace such debt maturities given Fitch's base-case projections for operating cash flow, access to the debt market, and adequate availability under its credit facility. The ratings are supported by Nalco's leading market position, broad product offerings, geographical reach, and strong customer retention. Concerns include a highly leveraged capital structure, and the majority of assets are intangibles. Growth rates in the water treatment segment are modest and tend to track gross domestic product; however, growth rates vary by end-use segment and region. Fitch estimates growth in North America in 2007 to be in the 3%-4% range. Emerging markets such as Latin America, Eastern Europe and Pacific region are likely to grow at 3.5%-6% per year. Therefore, Nalco is likely to realize more volume growth in emerging markets. Fitch estimates overall sales growth for Nalco in 2007 to be close to 4%. Nalco is a leading global provider of integrated water treatment and process improvement services, chemicals and equipment programs for industrial and institutional applications. Nalco's products and services are typically used in water treatment applications to prevent corrosion, contamination and the buildup of harmful deposits, or in production processes to enhance process efficiency and improve customers' end products. The company generated Operating EBITDA of $699.5 million on $3.74 billion in sales for the LTM period ending June 30, 2007. It is organized into three divisions which correspond to the end markets served: Industrial and Institutional Services, Energy Services and Paper Services. Fitch's Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default.