OI OI Glass Inc

Owens-Illinois Inc. (OI) recently acquired $2 billion credit, due in 2016, which it plans to deploy for the purpose of refinancing fixed rate bonds and other borrowings dating back to 2006.

The new secured credit agreement, which expires in May 2016, includes $1.1 billion in term loan and $900 million revolving credit line. Fitch assigned a rating of 'BBB-' to the new secured credit agreement.

Owens Illinois will use the proceeds from the new credit to repay the debt which it borrowed in 2006 against a credit agreement, due in June 2012. The company will also redeem $400 million senior notes, having a coupon rate of 6.75%, due in 2014. According to the Chief Financial Officer, the current market conditions favor and also provide ideal opportunity for refinancing the debt.

The company assumes that there will be no change in its total debt outstanding, but expects to incur lower interest expense of approximately $280 million in fiscal 2011, excluding the impact of redemption premiums and the write-off of finance fees.

As of March 31, 2011 net debt of the company was $3.933 billion, an increase of $295 million from fiscal 2010. The increase in net debt was primarily due to the use of free cash flow of $158 million to support seasonally higher working capital levels as well as $110 million on account of foreign currency translation.

Available liquidity on March 31, 2011 was $728 million under the company’s global revolving credit facility. Debt-to-capitalization ratio of the company improved to 64.7% as of March 31, 2011 from 65.9% as of December 31, 2010.

Even though the company’s debt-to-capitalization ratio remains on the higher side, it was lower compared with its closest competitor, Silgan Holdings Inc. (SLGN) which had a debt-to-capitalization ratio of 71.1% as of March 31, 2011.

Owens in its latest quarterly results posted revenue of $1,719 million, outperforming the Zacks Consensus Estimate of $1,662 million. However, the earnings of 48 cents dipped on a year-over-year basis due to higher costs, beating the Zacks Consensus Estimate of 45 cents. It had been reporting falling revenue and margins of late, with demand up globally for wine, food and spirits but sluggish for beer bottles in the more mature markets.

However in the quarter, Owens reported a net margin of 4.4%, after contracting 170 basis points year over year in the first quarter of 2011, faring better than Silgan which reported net margin of 3.7% during the same period. We expect the reduction in interest expense to help improve the company’s net margins in 2011.

Perrysburg, Ohio-based Owens-Illinois is the world's largest glass container manufacturer for food and beverage products, including beer, wine, spirits and non-alcoholic drinks. The company commands market leadership in each of its four operating regions: Asia Pacific, Europe, Latin America and North America. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.

 
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