Chicago, IL, December 15, 2006--Fitch Ratings has affirmed the following credit ratings for Omnova Inc.: Issuer default rating (IDR) at 'B+'; Senior secured credit facility at 'BB+, recovery rating (RR) 1'; Senior secured notes at 'B+/RR4'.
The rating outlook is stable. These rating actions affect $165 million in public securities and the company's $72 million senior secured credit facility.
Omnova 's credit ratings are supported by its small company size, relatively high debt level, and weak, though improving, operating performance. The company's size has declined and its product portfolio has become more limited upon the divestiture of its roofing business in late September 2006 for approximately $40 million cash.
The opportunistic sale monetized a small contributor to sales and operating income while removing warranty liabilities from the balance sheet. However, Fitch notes that resulting lower revenue and earnings levels make OMNOVA more susceptible to default risk when business conditions weaken. Total debt-to-operating EBITDA (unadjusted for the divestiture) remains high at 3.6 times (x) with $165 million 11.25% notes representing the majority of the outstanding debt.
These notes may be refinanced in 2007 after its call date at June 1 as the company tries to reduce future interest expense. The remaining portfolio has shown mixed results in 2006 so far. The decorative products segment began to contribute profit, although at very low levels, while the performance chemicals segment exhibited weaker margin and lower profit on lower volumes. Despite weaker profitability, performance chemicals continues to be the company's largest contributor to earnings. That Omnova 's stronger segment is presenting some weakness is a near-term concern.
The stable rating outlook reflects Fitch's view that operating performance and credit measures are expected to change modestly from current levels near term. Fitch expects performance chemicals to stabilize or possibly weaken if carpet demand remains weak and raw material prices soften with energy prices near term. Fitch also expects decorative products to weaken slightly if office vacancy rates increase in 2007 and a weaker U.S. economy stems refurbishment activity, resulting in slower wallcovering and laminate demand.
