Moody's cuts Solutia

Moody's Investors Service downgraded Solutia Inc. including cutting its $223 million guaranteed senior secured notes due 2009 to Caa1 from B3, $300 million senior unsecured debentures due 2027 and $150 million senior unsecured debentures due 2037 and putable in 2004 to Ca from Caa3 and Solutia Europe SA/NV's €200 million guaranteed senior unsecured notes due 2005 to Caa1 from B3. The outlook is negative.

Moody's said the downgrade was prompted by the company's announcement that it has initiated discussions with bondholders regarding a potential restructuring of its indebtedness.

The ratings continue to reflect significant refinancing risk with Solutia's $150 million senior unsecured debentures putable in August 2004 and the €200 million senior unsecured notes due in February 2005.

Moody's said it believes that the company's substantial OPEB and environmental liabilities, a significantly unfunded pension balance, and continued keepwell payments for Astaris (a 50/50 joint venture with FMC Corp.) will challenge the company's ability to refinance these obligations.

Compounding these issues is the company's continued weak operating performance, which has been pressured by elevated energy and raw material costs (particularly for natural gas, propylene, and cyclohexane) and soft demand.

The ratings consider that Solutia has successfully obtained a new $350 million revolving credit facility (not rated), which expires in 2006 (the previous revolver was set to expire in 2004). The ratings also consider Solutia's announced settlement, resolving the Abernethy and Tolbert PCB litigation against the company. Solutia's portion of the settlement is $50 million, which will be paid out over a period of 10 years beginning in 2004. Additionally, Moody's notes that Astaris has announced a major cost reduction plan, which could improve its operating performance, thus potentially reducing the amount of keepwell payments required from Solutia in 2004.

The negative outlook reflects uncertainty over the value of Solutia's assets in a potential restructuring when considering weak global market conditions, Moody's said.

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