(The following statement was released by the rating agency)Overview
-- Albany, N.Y.-based silicone and quartz producer Momentive PerformanceMaterials Inc. (MPM) plans to replace its existing revolving credit facilitywith a new $300 mil. asset-based revolving loan (ABL) facility.
-- MPM Escrow LLC and MPM Finance Escrow Corp., wholly-owned,special-purpose subsidiaries of MPM, plan to jointly issue $1.1 billion offirst priority senior secured notes due 2020 for refinancing.
-- We are assigning a 'CCC+' senior secured debt rating and a '2'recovery rating to these notes.
-- We are affirming our 'CCC' corporate credit rating on MPM.
-- We are placing our 'CCC' rating on the company's 1.5 lien notes onCreditWatch with negative implications and affirming all our other ratings.
-- The negative outlook reflects our view that the company's debt load isunsustainable at the current earnings level. We will likely lower the ratingsin the next several quarters unless earnings improve significantly.
Rating ActionOn Oct. 11, 2012, Standard & Poor's Ratings Services assigned its 'CCC+'senior secured debt rating (one notch above the corporate credit rating) and'2' recovery rating to the proposed offering of $1.1 billion of first-prioritysenior secured notes due 2020 by MPM Escrow LLC and MPM Finance Escrow Corp.The '2' recovery rating indicates our expectation of substantial (70% to 90%)recovery in the event of a payment default. If and when the escrow conditionsare satisfied (which must occur by Jan. 15, 2013), these notes will becomeobligations of MPM. The company plans to use the proceeds from the notes torepay revolver borrowings and other debt due in 2014 and 2015 and for generalcorporate purposes.
At the same time, we affirmed our 'CCC' corporate credit rating on MPM. Inaddition, based on our updated recovery analysis, we placed our 'CCC' ratingon the company's $250 million 1.5 lien notes due 2020 on CreditWatch withnegative implications. If the transaction closes as currently structured, wewill lower the ratings on these notes to 'CC' (two notches below the corporatecredit rating) with a recovery rating of '6', indicating our expectation ofnegligible (0%-10%) recovery in the event of a payment default.
We affirmed all our other ratings on MPM and its subsidiaries. If thetransaction closes as currently structured, the company expects its existingsecond priority springing lien notes will become secured, but the 'CC' issuerating and '6' recovery rating on these notes would not change.
The outlook remains negative.
In our view, leverage is unsustainably high, with total adjusted debt of about$4.1 billion and debt-to-EBITDA above 15x pro forma for the refinancing. Ourdebt adjustment totals about $1 billion and includes pay-in-kind (PIK) sellernotes at MPM's direct parent company, Momentive Performance Materials HoldingsInc. (unrated), tax-adjusted unfunded postretirement obligations, andcapitalized operating leases.
The ratings on MPM reflect the company's "highly leveraged" financial profileand what we deem to be a "fair" business risk profile. MPM's debt and leveragehave been high ever since controlling shareholder Apollo Global ManagementL.P. acquired the company from General Electric Co. in 2006. But, beginning inthe second half of 2011, earnings and cash flow weakness have caused leverageto reach very aggressive levels. Earnings challenges stem from:
-- Overcapacity in silicones, which has resulted in very competitivepricing;
-- A slowdown in the semiconductor industry, leading to lower demand forquartz;
-- Customer inventory reductions in late 2011; and
-- Weaker economic conditions in Europe and China.
We estimate that during the first three quarters of 2012, pro forma for costsassociated with the current refinancing, the company used about $180 millionof cash. Our base case assumes that, despite steps to lower operating costsand working capital, free operating cash flow will continue to be negative forat least the next several quarters.
Key assumptions for full-year 2012 include:
-- $100 million of capital spending;
-- Pension funding of $19 million;
-- A total of about $65 million for financing costs and restructuringoutlays to achieve synergies with Momentive Specialty Chemicals Inc. (MSC;B-/Stable/--), which is owned by the same parent holding company; and
-- Working capital becoming a slight source of cash for the full year2012. However, this could change if raw material costs spike.
We expect debt to continue to increase both to fund the shortfall in freeoperating cash flow and as a function of the PIK feature of the seller note atthe parent holding company. Consequently, we believe debt leverage will remainunsustainably high during the next several quarters, increasing the likelihoodof a default or debt restructuring in the absence of a meaningful reversal ofbusiness trends. Moreover, MPM has considerably more debt than its primarycompetitors, which could erode its competitiveness over time if it impedessufficient business reinvestment.
MPM is a large producer of silicones (representing more than 90% of sales andabout 75% of EBITDA in 2011), which are used in a wide variety ofapplications. MPM also produces quartz, which is used primarily insemiconductors. Construction, transportation, personal care, electronics, andagriculture utilize silicones. They are generally used as an additive,providing or enhancing attributes, such as resistance (to heat, ultravioletlight, or chemicals), lubrication, adhesion, or viscosity. Positive industryfactors include significant consolidation and historically above-averagegrowth rates. MPM benefits from good diversification by end market and region,as well as an increasing contribution from specialty products. However,sluggish demand and significant capacity additions in 2011 have resulted inoversupply and very competitive pricing. As a result, MPM's EBITDA marginshave dropped sharply from a peak of about 19% to below 10%.
Although the proposed refinancing would increase the absolute amount ofliquidity, eliminate maintenance financial covenants, and considerably extenddebt maturities, we nevertheless continue to regard liquidity as "weak" asdefined in our criteria. This is because at the current earnings level, weexpect the company's free operating cash flow to be negative for at least thenext several quarters and for liquidity to therefore contract. In our basecase forecast, EBITDA is about $200 million in 2012 (somewhat higher ascalculated under the financial covenant in MPM's existing credit facilities)and increases only slightly in 2013. In this scenario, sources of liquidityare insufficient to cover projected uses by the end of 2013.
MPM intends to enter into a new $300 million ABL (asset-based loan) revolvingcredit facility maturing in 2017 to replace its existing $300 millionrevolving credit facility and $35 million synthetic letter of credit (L/C)facility ($33 million of L/Cs outstanding). It has obtained $270 million incommitments from financial institutions and expects to obtain an additional$30 million in commitments following the offering of the notes. We estimatethat following the proposed revolver and notes refinancing, the company willhave $143 million of cash and $185 million of borrowing capacity (afterdeducting $78 million of L/C's issued plus borrowing base restrictions of$37.5 million or 12.5% of the facility amount). If the refinancing iscompleted as currently structured, MPM would have no significant debtmaturities until 2016.
Recovery analysisIf the company completes the refinancing as currently structured (includingthe new $300 million ABL facility), MPM's first-priority senior secured debtrating will be rated 'CCC+' (one notch above the corporate credit rating) witha recovery rating of '2', indicating prospects for substantial (70% to 90%)recovery in the event of a payment default. All its other debt, including its1.5 lien notes, second-priority notes, and subordinated notes, will be rated'CC' (two notches below the corporate credit rating) with a recovery rating of'6', denoting prospects for negligible (0% to 10%) recovery in the event of apayment default. For the full recovery analysis, please see our recoveryreport on MPM to be published shortly.
The negative outlook reflects our expectation that silicone overcapacity and atepid global economy will cause MPM's free operating cash flow to be negativefor at least the next several quarters, causing liquidity to contract. We arelikely to lower the ratings during the next several quarters if industryconditions fail to improve sufficiently to enable MPM to achieve cash flowneutrality and stabilize liquidity, heightening the probability of a paymentdefault. We could also lower the ratings sooner if the proposed $300 millionABL and notes financing is not completed as currently structured, or if thecompany voluntarily restructures or repurchases its debt in such a way thatresults in anything less than full and timely repayment.
On the other hand, we could revise the outlook to stable if earnings and cashflow strengthen, leverage declines, and liquidity stabilizes at a level weconsider adequate.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,Sept. 18, 2012
-- Key Credit Factors: Business And Financial Risks In The Commodity AndSpecialty Chemical Industry, Nov. 20, 2008
-- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And'CC' Ratings, Oct. 1, 2012
-- Methodology And Assumptions: Liquidity Descriptors For GlobalCorporate Issuers, Sept. 28, 2011
Ratings ListRatings Affirmed
Momentive Performance Materials Inc.
Corporate credit rating CCC/Negative/NR
Momentive Performance Materials Inc.
Senior secured B-Recovery rating 1Senior secured CCRecovery rating 6Senior unsecured CCRecovery rating 6Subordinated CCRecovery rating 6
Momentive Performance Materials GmbH
Senior secured B-Recovery rating 1
Momentive Performance Materials USA Inc.
Senior secured B-Recovery rating 1New RatingMPM Escrow LLCMPM Finance Escrow Corp.Senior secured
US$1.1 bil first-priority sr secd
nts due 10/15/2020 CCC+Recovery rating 2
Rating Affirmed; CreditWatch Action
Momentive Performance Materials Inc.
Senior secured$250m 1.5 lien nts due 2020 CCC /Watch Neg CCCRecovery rating 4 4
Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)