Advanced Glassfiber Yarns Asgnd BB- Bnk Ln Rtg by S&P.

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 10/21/98--Standard & Poor's today assigned its double-'B'-minus corporate credit rating to Advanced Glassfiber Yarns LLC. (AGY).

At the same time, Standard & Poor's assigned its double-'B'-minus bank loan rating to the company's $315 million senior secured credit facilities. The outlook is stable.

The ratings reflect AGY's leading position in the technically demanding manufacture of glass fibers offset by a relatively narrow product mix, sales to cyclical end markets, customer concentration, a lack of independent operating history, and an aggressive financial risk profile.

AGY was formed by Owens Corning (triple-'B'-minus/Negative/--)to operate its glass yarns and specialty materials business. Owens Corning has agreed to sell a 51% ownership interest in AGY to a wholly owned subsidiary of unrated Porcher Industries S.A. Porcher, a privately held company based in France, is a leader in the industrial fabrics industry and AGY's largest customer. The purchase of the 51% ownership interest was funded with debt at AGY and its affiliate, BGF Industries Inc., to which double-'B'-minus corporate credit and bank loan ratings (see related press release) have also been assigned.

AGY is a leading global supplier of glass yarns used in a wide variety of applications including printed circuit boards, roofing materials, filtration equipment, and reinforced tapes. Glass fibers' attributes include a high strength-to-weight ratio, dimensional stability, a lack of thermoconductivity, and resistance to heat, moisture, and chemicals. In addition, glass fibers cost less than other high-strength materials such as carbons, aramids, ceramics and quartz. Competition is limited, with five glass yarn manufacturers responsible for 80% of worldwide annual sales estimated at $1.2 billion. In addition, AGY has the leading market share of higher-margin fine yarns used primarily for laminates in multi-layer printed circuit boards (the fine yarn market size is roughly $180 million). Low cost operations contribute to healthy operating margins of approximately 30%.

The electronics, aerospace, and construction industries account for a majority of sales. Currently, imports of laminates and rigid printed circuit boards from Asia (where glass fiber yarn and fabric manufacturers are vertically integrating and benefit from low labor costs and recent currency devaluations) have been negatively affecting demand for domestically produced glass fiber fabrics. Although high switching costs discourage customers from changing suppliers, customer concentration is a risk, with the ten largest customers accounting for to more than 60% of total sales. Following establishment of the joint venture, AGY will continue to rely on Owens Corning for critical support in areas such as the supply and maintenance of specialized equipment.

AGY has an aggressive capital structure, with debt-to- earnings before interest depreciation and amortization (EBITDA) of about 4.6 times (x). Interest coverage is expected to be weak, about 2.0x-2.5x the next few years. It is anticipated that $150 million in unrated subordinated increasing rate bridge notes will be refinanced at a fixed rate within the next two years. Capital spending requirements should be modest. As a result, the company should generate between $20 million and $30 million in annual free operating cash flow that is expected to be used primarily for debt reduction. Financial flexibility is aided by a three-year keep-well agreement with Owens Corning.

The bank credit facilities consist of a $75 million 6-year revolver, $115 million six-year term loan A, and $125 million seven-year term loan B. Term loan A amortizes, with scheduled repayments stepping up over time. Term loan B has minimal amortization. However, the company is required to use a portion of excess cash flow, as defined, to permanently reduce borrowings under the term loans. Pricing is based on the company's debt leverage ratio. Financial covenants include minimum interest and fixed charge coverage and maximum leverage ratios, and a specified minimum net worth. The bank loan rating is the same as the corporate credit rating. The credit facilities are secured by a first priority lien and security interest in all assets of AGY, a pledge of Glass Holding Corp.'s 51% and negative pledge of Owens Corning's 49% ownership interest. Although the collateral should provide some protection to lenders, it is not certain that they would recover the total amount outstanding in a default scenario assuming full utilization of the credit facilities.

OUTLOOK: STABLE

Leading positions in niche markets and limited competition are key strengths. However, because the absolute levels of sales and cash flows are modest and debt servicing requirements are high, even minor changes in operating conditions could significantly weaken credit protection measures, Standard & Poor's said. -- CreditWire