Momentive Performance Materials Inc. Updgraded To 'BB-' On Closing Of Acquistion By KCC Corp.; Outlook Stable

  • The previously announced acquisition of Momentive Performance Materials Inc. by a Korean consortium including KCC Corp. for $3.1 billion closed May 15, 2019, leading to ownership changes at Momentive.
  • As part of the transaction, Momentive issued a $300 million asset-based lending (ABL) facility (unrated), a first-lien credit facility, which now consists of a $750 million (previously $839 million) senior secured term loan B due 2024 and a new $78 million euro tranche, and an (unrated) $839 million Korean bank loan, guaranteed by KCC Corp.
  • Momentive has redeemed all existing debt, including its first- and second-priority senior secured notes due 2021 and 2022, so we are withdrawing our ratings on this debt.
  • We are raising the issuer credit rating to 'BB-' from 'B+' given our view that Momentive will receive some level of group support from the higher-rated KCC Corp. At the same time, we are raising our issue-level rating on the company's first-lien secured credit facility to 'BB-' from 'B+'. We are removing all ratings from CreditWatch where we placed them with negative implications April 1, 2019. The recovery rating remains '3' on the facility.
  • The stable outlook reflects our view that Momentive will continue to see modest revenue growth driven by improved product mix and silicone volume growth, while maintaining credit metrics in 4x-5x range.
NEW YORK (S&P Global Ratings) May 17, 2019-- S&P Global Ratings today took the rating actions listed above. The upgrade reflects our expectation that Momentive will receive some sort of group support from KCC Corp. On Sept. 13, 2018, a KCC -led consortium announced plans to acquire 100% of Momentive for about US$3 billion. KCC received U.S. regulatory approval for the transaction in April 2019, and its board of directors passed the resolution in May 2019. The transaction closed on May 15, 2019. At that time, we determined that Momentive would likely receive group support from KCC, leading us to raise the ratings by one notch. We believe were Momentive to face any financial difficulties or burden, KCC would provide some sort of indirect support, as demonstrated by its guarantee of nearly half of Momentive's debt. In addition, we believe that Momentive is important to KCC's long-term strategy because it provides scale and geographic diversity to its existing silicone business.
The stable outlook indicates our expectation of a modest revenue increase during the next few years, reflecting Momentive's silicone volume growth, and improved product mix. We believe that GDP and key end-market growth will support the company's volume growth. We believe total adjusted debt to EBITDA will remain between 4x and 5x on an adjusted basis over the next 12 months. Our stable outlook does not anticipate any large debt-funded acquisitions or shareholder rewards and it takes into account that KCC will support Momentive.
We could lower the rating on Momentive over the next 12 months if, contrary to our expectations, adjusted debt to EBITDA exceeds 5x on a sustained basis. Factors that could contribute to weaker operating performance include competitors lowering prices, a sharp spike in raw material costs, or a significant reduction in or loss of key customers' business with resulting in a decline in EBITDA margins to 6% from the expected low-teens-percentage range. We could also lower the ratings should the company engage in any further debt repurchases if it we believed these purchases were not opportunistic and debt repurchases that we consider to be distressed exchange. If we do not believe KCC will provide adequate support to Momentive, we could lower ratings on Momentive.
We could consider an upgrade if the company continues to improve operating results driven by an improved product mix and an uptick in product demand beyond our expectations. In an upside scenario, we would expect an EBITDA improvement that is 500 basis points (bps) above our base case, with adjusted debt to EBITDA trending toward 4x and FFO to debt approaching 20% over the next 12 months. In addition, if our assessment of Momentive's group status within the KCC improves we could raise ratings on Momentive.
Waterford, N.Y.-based Momentive Performance Materials Inc. is the second-largest silicone producer worldwide. Momentive is a global producer of specialty silicones and silanes, fused quartz, and specialty ceramic products. For the year-ended December 2018, total revenue was $2.7 billion.
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