TEXT-Moody's release on Evonik Degussa GmbH

(The following statement was released by the ratings agency)

July 24 - Moody's Investors Service today changed the outlook on the Baa3/P-3 senior unsecured ratings of Evonik Degussa GmbH.("Evonik Degussa") to stable from negative.

Moody's said that the revision of Evonik Degussa's outlook to stable reflects its improved financial risk profile following the successful separation of RAG's hard coal mining activities from the industrial activities of its 100% owner Evonik Industries in parallel with the material reduction in the group's consolidated debt and recovery in credit metrics achieved over the past two years.

The new legislation passed by the German parliament at the end of 2007, which provides the financing for the phasing out of the subsidised hard-coal mining industry in the period through 2018, has allowed the dissolution of the joint liability arrangement between RAG AG and Evonik Industries. This, in turn, has removed any exposure of Evonik Industries to future mining-related legacy liabilities.

At the same time, Evonik Industries's financial profile has benefited from some improvement in operating cash flow generation reflecting the robust underlying performances posted by all three of its business units, including Evonik Degussa despite significant raw material cost inflation. This together with EUR1.3 billion in proceeds raised from the disposal of various assets including the DBT mining technology, Saar Ferngas gas distribution and Ruetgers tar refining businesses have enabled Evonik Industries to reduce debt and improve its credit metrics. Given Evonik Degussa's full integration within Evonik Industries's finance and cash management, this in turn reduces the likelihood of any undue pressure coming to bear on the financial position of the chemicals group.

On a more cautious note, Moody's notes that high restructuring-related cash outlays will constrain Evonik Industries's cash flow generation in 2008 and leave its cash-flow metrics weakly positioned for the Baa3 rating. In addition, the adoption of a high dividend payout close to 50% of net profit following the sale of a blocking 25.1% stake in Evonik Industries to CVC by its foundation-owner combined with increased capex, as the group completes some major chemicals and power projects, is likely to prevent any further debt reduction in the near to intermediate term.

However, the revision of the outlook to stable is predicated on Moody's expectation that the continuing solid operating performance of the group's three businesses supported by recent restructuring action and an ongoing focus on cost efficiency as well as additional contributions from new investments due to come on stream in the coming years, will help underpin Evonik Industries' operating cash flow generation and lead to some further recovery in its adjusted credit metrics with Net Debt to EBITDA falling to around 3 times and RCF to Net Debt recovering into the high teens.

Evonik Degussa's Baa3 rating also reflects its position as a leading global specialty and intermediate chemicals group with a substantial number of top three global market positions; a broad product, geography, and customer end-market diversification; a high degree of backward integration in some product areas providing for a competitive cost position; and success in transforming and restructuring the group to a less-cyclical, more specialty chemicals-end company. Robust operating cash flow generation has allowed Evonik Degussa to remain free cash flow positive post investments in recent years. Going forward, despite persistent raw material cost inflation and some contrasting performances across the portfolio, Moody's expects Evonik Degussa's operating results to show resilience helped by the superior ability of some of its businesses to pass on price increases that results from either favourable market conditions (e.g. feed additives) or contractual terms (e.g. C4-chemistry).

Headquartered in Essen, Germany, Evonik Degussa is a wholly-owned subsidiary of Evonik Industries AG and a leading global specialty and intermediate chemicals group with sales of EUR10.9 billion in 2007.