The rating outlook is changed to negative.The downgrade was prompted by Moody's view that Pilkington's operating performance will continue to be severely affected by depressed market conditions in the US and European construction industry and relatively weak automotive markets.Notwithstanding its geographic diversification, Pilkington has been unable to offset weak demand trends in Europe and North America by the more positive markets in UK and Australia. We believe that these conditions will limit Pilkington's potential to deliver improved debt protection measurements over the intermediate term.
Ratings affected: Pilkington plc -- Baa2 (from Baa1) for senior unsecured debt
The revised rating also considers the progress Pilkington has made in reorganizing its North American operations under its rationalization programme. Ongoing productivity improvements have contributed largely to the overall satisfactory results of the automotive business, considering the highly competitive environment in the automotive supplier industry. However, Moody's remains cautious about Pilkington's ability to improve profitability in a protracted economic downturn. Pilkington's building products business is currently suffering from cyclically depressed markets, resulting from very weak commercial construction in North America and sluggish demand in most of continental Europe.
Favourable trends in the UK, as well as in Australia stemming from strong housing markets and legislative requirements in the UK mandating the use of energy-saving glass could not off set pressure on selling prices in continental Europe, due to over-capacity for float glass and slack demand, particularly in Germany. In light of the market slowdown, sales of Pilkington's self-cleaning glass have not developed as quickly as Moody's anticipated, the agency noted, although the product roll out is still in its early days. Despite the prevailing market conditions Pilkington's business remains to be cash generative. Capex and acquisition activity have been adjusted downwards to account for the challenging environment.
Nevertheless, cash flow generation has been significantly lower than anticipated, resulting in an extended timeline with regard to debt reduction and consequently weaker debt service measurements. Moody's believes that management continues to be committed to debt reduction over the longer term. Apart from its operating cash flow and contracted asset sales, the company relies on committed credit lines of its core relationship banks for short-term funding needs. The evenly spread maturity schedule shows several upcoming maturities which Moody's understands are being currently renegotiated. These maturities, however, are well covered further arranged unused credit facilities totaling GBP 270 million. The revised rating still reflects Moody's expectation that the company has room to improve its operating performance through cost savings, however, if this is not achieved and if the depressed market conditions continue, further negative pressure could result.
The Pilkington Group, headquartered in St. Helens, UK, is one of the world's largest manufacturers of flat and safety glass for the building and automotive markets, with FY (March 31) 2002 group sales of approx. GBP 2.8 billion.