(The following statement was released by the rating agency) Overview
-- Albany, N.Y.-based silicone and quartz producer Momentive Performance Materials Inc. (MPM) plans to replace its existing revolving credit facility with 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 of first 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 on CreditWatch with negative implications and affirming all our other ratings.
-- The negative outlook reflects our view that the company's debt load is unsustainable at the current earnings level. We will likely lower the ratings in the next several quarters unless earnings improve significantly.
Rating Action On 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-priority senior 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 conditions are satisfied (which must occur by Jan. 15, 2013), these notes will become obligations of MPM. The company plans to use the proceeds from the notes to repay revolver borrowings and other debt due in 2014 and 2015 and for general corporate purposes.
At the same time, we affirmed our 'CCC' corporate credit rating on MPM. In addition, based on our updated recovery analysis, we placed our 'CCC' rating on the company's $250 million 1.5 lien notes due 2020 on CreditWatch with negative implications. If the transaction closes as currently structured, we will lower the ratings on these notes to 'CC' (two notches below the corporate credit rating) with a recovery rating of '6', indicating our expectation of negligible (0%-10%) recovery in the event of a payment default.
We affirmed all our other ratings on MPM and its subsidiaries. If the transaction closes as currently structured, the company expects its existing second priority springing lien notes will become secured, but the 'CC' issue rating 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. Our debt adjustment totals about $1 billion and includes pay-in-kind (PIK) seller notes at MPM's direct parent company, Momentive Performance Materials Holdings Inc. (unrated), tax-adjusted unfunded postretirement obligations, and capitalized operating leases.
The ratings on MPM reflect the company's "highly leveraged" financial profile and what we deem to be a "fair" business risk profile. MPM's debt and leverage have been high ever since controlling shareholder Apollo Global Management L.P. acquired the company from General Electric Co. in 2006. But, beginning in the second half of 2011, earnings and cash flow weakness have caused leverage to reach very aggressive levels. Earnings challenges stem from:
-- Overcapacity in silicones, which has resulted in very competitive pricing;
-- A slowdown in the semiconductor industry, leading to lower demand for quartz;
-- 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 costs associated with the current refinancing, the company used about $180 million of cash. Our base case assumes that, despite steps to lower operating costs and working capital, free operating cash flow will continue to be negative for at 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 restructuring outlays 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 year 2012. However, this could change if raw material costs spike.
We expect debt to continue to increase both to fund the shortfall in free operating cash flow and as a function of the PIK feature of the seller note at the parent holding company. Consequently, we believe debt leverage will remain unsustainably high during the next several quarters, increasing the likelihood of a default or debt restructuring in the absence of a meaningful reversal of business trends. Moreover, MPM has considerably more debt than its primary competitors, which could erode its competitiveness over time if it impedes sufficient business reinvestment.
MPM is a large producer of silicones (representing more than 90% of sales and about 75% of EBITDA in 2011), which are used in a wide variety of applications. MPM also produces quartz, which is used primarily in semiconductors. Construction, transportation, personal care, electronics, and agriculture utilize silicones. They are generally used as an additive, providing or enhancing attributes, such as resistance (to heat, ultraviolet light, or chemicals), lubrication, adhesion, or viscosity. Positive industry factors include significant consolidation and historically above-average growth 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 in oversupply and very competitive pricing. As a result, MPM's EBITDA margins have dropped sharply from a peak of about 19% to below 10%.
Although the proposed refinancing would increase the absolute amount of liquidity, eliminate maintenance financial covenants, and considerably extend debt maturities, we nevertheless continue to regard liquidity as "weak" as defined in our criteria. This is because at the current earnings level, we expect the company's free operating cash flow to be negative for at least the next several quarters and for liquidity to therefore contract. In our base case forecast, EBITDA is about $200 million in 2012 (somewhat higher as calculated under the financial covenant in MPM's existing credit facilities) and increases only slightly in 2013. In this scenario, sources of liquidity are insufficient to cover projected uses by the end of 2013.
MPM intends to enter into a new $300 million ABL (asset-based loan) revolving credit facility maturing in 2017 to replace its existing $300 million revolving credit facility and $35 million synthetic letter of credit (L/C) facility ($33 million of L/Cs outstanding). It has obtained $270 million in commitments from financial institutions and expects to obtain an additional $30 million in commitments following the offering of the notes. We estimate that following the proposed revolver and notes refinancing, the company will have $143 million of cash and $185 million of borrowing capacity (after deducting $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 is completed as currently structured, MPM would have no significant debt maturities until 2016.
Recovery analysis If the company completes the refinancing as currently structured (including the new $300 million ABL facility), MPM's first-priority senior secured debt rating will be rated 'CCC+' (one notch above the corporate credit rating) with a recovery rating of '2', indicating prospects for substantial (70% to 90%) recovery in the event of a payment default. All its other debt, including its 1.5 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 a payment default. For the full recovery analysis, please see our recovery report on MPM to be published shortly.
The negative outlook reflects our expectation that silicone overcapacity and a tepid global economy will cause MPM's free operating cash flow to be negative for at least the next several quarters, causing liquidity to contract. We are likely to lower the ratings during the next several quarters if industry conditions fail to improve sufficiently to enable MPM to achieve cash flow neutrality and stabilize liquidity, heightening the probability of a payment default. We could also lower the ratings sooner if the proposed $300 million ABL and notes financing is not completed as currently structured, or if the company voluntarily restructures or repurchases its debt in such a way that results in anything less than full and timely repayment.
On the other hand, we could revise the outlook to stable if earnings and cash flow strengthen, leverage declines, and liquidity stabilizes at a level we consider 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 And Specialty 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 Global Corporate Issuers, Sept. 28, 2011
Ratings List Ratings Affirmed
Momentive Performance Materials Inc.
Corporate credit rating CCC/Negative/NR
Momentive Performance Materials Inc.
Senior secured B- Recovery rating 1 Senior secured CC Recovery rating 6 Senior unsecured CC Recovery rating 6 Subordinated CC Recovery rating 6
Momentive Performance Materials GmbH
Senior secured B- Recovery rating 1
Momentive Performance Materials USA Inc.
Senior secured B- Recovery rating 1 New Rating MPM Escrow LLC MPM 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 CCC Recovery rating 4 4
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)