Terms of a new financing package will require Owens-Illinois, Inc., to pay higher interest rates and to provide lenders with safeguards in case the Toledo firm is forced to file for bankruptcy protection, according to a wire service report.
A consortium of 80 international banks, led by Germany's Deutsche Bank AG, have agreed to replace $4.5 billion in credit expiring at the end of the year, but under more stringent terms.
The interest rate will be 1.4 percentage points higher than the firm currently pays, according to Bloomberg News Service and other sources.
This increase could boost annual interest payments, which hit $487 million last year, by as much as to $50 million.
Also, the lenders are demanding that the Toledo company put up collateral such as buildings, factories, and other assets. This step would help guarantee repayment of the loans if the firm were forced to file for bankruptcy because of mounting asbestos liability expenses. Deutsche Bank officials told participating banks at meetings in New York last week that this step was possible because of a loophole in the firm's agreement with bond holders.
John Hoff, an O-I spokesman, confirmed that the firm is negotiating with lenders but declined further comment. Executives have said they have no plans to seek bankruptcy protection. The company, which supplies bottles, jars, and other containers to brewers and others, is Toledo's second-largest company, with annual sales of $5.6 billion.
Steven Altman, a bond specialist with Fitch, IBCA, Duff & Phelps, said he was unfamiliar with the loophole and believed the firm's bond holders and banks would be on an equal footing in the event of a bankruptcy. He conceded, however, that it isn't unusual for banks to insist on collateral to ensure they are paid first in case of bankruptcy.
Rob Strand, a senior economist with the American Bankers Association, agreed. “Lenders are always looking for collateral,” he said.
Under the new loan agreement, O-I will pay an interest rate of 2.5 per cent above the London Interbank Offered Rates, a common international benchmark. The Toledo company currently pays 1.1 per cent above that rate. Actual interest payments will vary, because the London rate - currently about 5 percent - fluctuates.
Analysts aren't surprised that banks are demanding higher interest rates because O-I's credit-rating was reduced to junk status from near-investment grade as a result of falling profits and a wave of bankruptcies among former producers of asbestos-containing products. Toledo's Owens Corning filed for Chapter 11 protection Oct. 5. Problems of both firms stemmed from asbestos-containing insulation they formerly made.
As of Dec. 31, O-I owed banks and bond-holders $5.9 billion, down from $5.8 billion in 1999.