Ardagh Glass has had its credit ratings cut because of growing competition and margin pressure in the UK.
Ratings agency Standard & Poor's (S&P) yesterday downgraded its long-term credit rating on Ardagh's long-term corporate credit and on its subordinated bond and pay-in-kind (PIK) notes.
The agency said the outlook for the ratings, all of which are below investment grade or "junk", remains negative.
"The downgrade reflects the ongoing difficult operating environment in Ardagh's main UK market, where the group's cost base has been affected by unprecedented high and volatile natural gas prices," said Standard & Poor's credit analyst Vanessa Braithwaite.
She noted that Ardagh has no hedging in place and is thus facing margin pressure that is set to intensify this year with the full opening of Seán Quinn's new €364 glass plant in Chester.
The impact of Quinn Group's investment was also highlighted last week when another rating agency, Moodys, said it was considering a downgrade of Ardagh's ratings.
Standard & Poor's believes the UK market will move closer to a "situation of overcapacity" when the Quinn plant is fully operational. "It will be extremely difficult for Ardagh to recover the cost inflation in this market, where customer concentration [and, therefore, price-negotiating power] is very high," the agency noted.
Ardagh's top 10 customers represent almost two-thirds of sales, according to the analysis.
The agency warned that a continued deterioration in Ardagh's UK operating environment could lead to cashflow problems.
It noted that its ratings could be lowered again if there was evidence that Ardagh was having trouble maintaining its cashflow or in keeping its credit measures in line with existing ratings.
"In addition, the ratings could be lowered if the group is unable to maintain satisfactory liquidity, with enough cash and available lines to fund working capital and debt servicing," Standard & Poor's noted.
After yesterday's change, the agency has a B rating on Ardagh's long-term corporate credit and a CCC+ rating on the company's subordinated bond and PIK notes.
Ardagh Glass was spun off from Ardagh plc (now South Wharf) in 2003 and was last year taken over by Caona plc, a special-purpose company controlled by some of Ardagh's largest shareholders, including businessman Paul Coulson.
Caona offered €53.2 million or €4 per share and funded the deal through a €126 million bond issue.
The deal attracted some controversy after a group of dissident shareholders in Ardagh Glass claimed the company's directors should have advised shareholders whether the price offered by Caona was fair.
Ardagh and Caona argued that it was up to the Ardagh Glass shareholders to form their own view.
