Thursday, March 3, 2011

Morningstar Slashes Dupont's (DD) Credit Rating

Citing weak credit metrics from Dupont (NYSE:DD), Morningstar cut their credit rating on the company from A- to BBB+.

Morningstar said the closing of the $6.3 billion deal with Danisco in the second half, which was funded with new debt and cash, was the major impetus behind the decision.

"DuPont's elevated level of total indebtedness and large pension deficit--two areas where we had expected to see more progress at this point in the economic recovery--also lead us to believe a BBB+ rating represents a more appropriate assessment of underlying credit quality.

"We acknowledge DuPont's 2010 operating results represented a significant improvement over the prior year. A 21% revenue rebound combined with an over 350 basis-point improvement in EBITDA margin increased absolute EBITDA by 75% over 2009, and cut the year-end gross debt leverage from 3.8 times to 2.2 times. However, after adjusting for the pension deficit ($5.5 billion as of year-end 2010, not materially changed from prior years) and the Danisco acquisition, we expect to see a total adjusted gross leverage of over 5 times in 2011 (granted, only half of Danisco’s earnings contribution is included in the pro forma statement for 2011). In 2012, we expect leverage to decline to 4.7 times with full-year Danisco earnings.

"While we expect DuPont's credit metrics to gradually improve in the next few years, significant capital expenditures and shareholder distributions mean it would take significant time and management commitment for DuPont to reduce leverage to levels commensurate with our prior A- rating. We estimate the company will generate $4.5 billion-$5 billion in cash from operations annually in the next two years, which largely would be consumed by $2 billion in annual capital expenditures plus $1.5 billion-$2 billion annual dividends, leaving little room for voluntary debt reduction and/or large pension contributions in the near term."

DuPont closed in New York at $53.06, dropping $0.16, or 0.30.

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