Moody's may cut Ashland to junk

Moody's Investors Services said that the senior unsecured ratings of Ashland Inc. would likely be lowered to Ba1 from Baa2 following the completion of the sale of its 38% equity interest in Marathon Ashland Petroleum LLC (MAP) to Marathon Oil Corp.

Moody's also noted that Ashland's Baa2 ratings will remain under review for possible downgrade until the completion of the tender offer.

The remaining stub bonds, if any, would be lowered to Ba1 at that time and the commercial paper rating would be lowered to Not-Prime. If the MAP transaction does not occur, Ashland's Baa2 and P-3 ratings would likely be confirmed, the agency said.

Ashland plans to use a substantial portion of the $3.4 billion in proceeds ($2.8 billion from the transaction and at least $560 million of deferred distributions) to retire the vast majority of its debt and a portion of its other financial obligations, including operating leases and pensions. After completion of the tender offer and payment of other obligations, the company expects that it will have more than $1.1 billion in cash on its balance sheet.

Moody's said its potential downgrade to Ba1 would reflect the temporary nature of the company's large cash balance in light of management's intent to re-lever the balance sheet over time to a 30% debt to capital or 2-3 times debt to EBITDA level. Furthermore, the company's wholly-owned businesses (excluding its interest in MAP) continue to generate weak operating margins, and despite some modest improvement, have not demonstrated the ability to generate meaningful levels of free cash flow.

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