The Dominion Bond Rating Service Limited (DBRS) has downgraded the senior long-term debt rating for The Procter & Gamble Company (“P&G”) from AA to AA (low) with a Stable trend.
This removes the rating from “Under Review with Negative Implications”, where it was placed on May 22 when P&G announced that it intended to purchase the Clairol hair products division of Bristol Myers Squibb for US$4.95bn, and reflects four considerations.
Firstly, DBRS explains that “share repurchases and weaker operating results had deteriorated the previously above-average balance sheet” and the Clairol acquisition is “anticipated to further raise net debt nearly $5bn in F2002”. Furthermore, “the time required to restore the balance sheet’s quality to a state similar to that prior to Clairol’s purchase is uncertain.”
Indeed, secondly, DBRS believes that the Clairol purchase “introduces sizeable integration risks at a time when many divisions are undergoing difficulties and restructuring activities.”
The difficulties encountered in implementing the restructuring initiatives of its Reorganization 2005 program are offered as the third consideration. DBRS explains: “While some progress has been seen recently, considerable work remains.”
Lastly, DBRS considers that “near-term earnings improvement will be challenging despite planned and current efforts to address growth rates and cost competitiveness difficulties.”
DBRS stresses that despite the recent downgrading: “P&G remains one of the largest and most capable consumer products companies globally, with exceptional geographic and product category diversification. The strong portfolio of leading brand name products has enabled it to consistently achieve high levels of profitability and enhance the quality of its free cash flow.”