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Tue 30 Dec 2008 08:46 AM

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Dow ratings downgraded after Kuwait deal scrapped

Rating agencies take action after Kuwait pulls out of $17.4bn venture with chemical giant.

Standard & Poor's and Moody's Investors Service on Monday downgraded their ratings for Dow Chemical Company after Kuwait scrapped a $17.4 billion deal to create a petrochemicals joint venture.

Dow's shares plunged over Wall Street fears that the company's $18.8 billion planned purchase of rival firm Rohm and Haas may be put into question.

Kuwait's decision to pull out, announced Sunday, "was unexpected given Dow's recent confidence that it would close the transaction, and is a significant development from both a strategic and financial profile standpoint," Standard & Poor's credit analyst Kyle Loughlin said in a statement.

The ratings agency said the venture would have provided nearly $7 billion in much-need proceeds for Dow to acquire Rohm and Haas, a US specialty materials firm.

Standard & Poor's lowered its grade by two notches for Dow from "A-" to "BBB," the second-lowest investment grade. Moody's cut its ratings for Dow by one notch to "BAA1," the third-lowest investment grade, from "A3."

The US chemical giant's shares fell 19.03 percent to close at 15.32 dollars in New York trade, while Rohm and Haas tumbled 16.08 percent to $53.34.

The failed deal "substantially increases the likelihood that Dow's credit profile will be weakened in any reasonable scenario," Moody's said in a statement.

Moody's said the ratings for both Dow and Rohm and Haas would "remain under review pending final resolution of these issues." Standard & Poor's said it could lower its ratings again after the Rohm and Haas transaction would be completed.

The Kuwaiti government said it was canceling an agreement, signed last month, for state-owned Petrochemicals Industries Co. (PIC) to pay $7.5 billion for a stake in a 50-50 joint venture with Dow Chemical to be called K-Dow Petrochemicals.

Under the agreement, Dow would have contributed assets, including plants and research center in several countries.

The government was forced to scuttle the deal in the face of opposition from Kuwaiti lawmakers who alleged the value of those assets had plummeted due to the global financial crisis.

Moody's said its "downgrade reflects the likelihood that the political situation in Kuwait will make it more difficult to successfully complete the K-Dow transaction even at a lower price, and the lack of any contractual exit from the Rohm and Haas acquisition."

Dow said it was "extremely disappointed" by the Kuwaiti government's decision and was evaluating its options under the joint-venture agreement but remained committed to its Middle East strategy.

If the deal had not been scrapped before January 1, when it was due to become effective, Kuwait would have been liable to pay a penalty of up to $2.5 billion.

The failed deal was "a setback to Dow's strategy to transform the business profile," Standard & Poor's said, noting the K-Dow venture would have "substantially muted Dow's exposure to the current petrochemical downturn" and emphasized its reliance on diversified performance chemicals.

Dow, announcing in July it would buy Rohm and Haas for $18.8 billion in cash, said the acquisition would "make Dow the world's leading specialty chemicals and advanced materials company."

Rohm and Haas Company said late Sunday that the completion of the K-Dow Petrochemicals partnership "is not a closing condition" for its proposed acquisition by Dow.

"Some analysts think Dow will come under pressure to renegotiate its offer price" for Rohm and Haas, analysts at Briefing.com said.

Dow announced three weeks ago it would cut about 5,000 full-time jobs, close 20 facilities and divest non-strategic businesses in an aggressive move to cope with dire economic times.

The diversified chemical giant also was suspending operations in 180 plants and significantly reducing its contractor workforce worldwide by 6,000 as it joined other American companies in axing staff amid a deepening recession.

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