Hexion Inc. Downgraded To 'B-' On Expected Lower Demand, Earnings; Outlook Negative

  • We anticipate a global economic slowdown in 2020 will hurt demand and earnings for U.S.-based Hexion Inc. This follows a year in which competitive pressures caused weaker-than-expected earnings and higher leverage from Hexion's post-emergence capital structure.
  • As a result, we are lowering our issuer credit rating to 'B-' from 'B'. The outlook is negative.
  • At the same time, we are lowering our issue-level rating on the company's term loan facility to 'B+' from 'BB-' with a '1' recovery rating, indicating our expectation for very high recovery (90%-100%; rounded estimate: 95%) in a payment default. We are also lowering the issue-level rating on the company's unsecured notes to 'CCC+' from 'B-' with a '5' recovery rating, indicating our expectation for modest recovery (10%-30%; rounded estimate: 10%).
  • The negative outlook reflects the risks that macroeconomic conditions could weaken more than we anticipate and, consequently, that leverage could approach double digits.
NEW YORK (S&P Global Ratings) March 25, 2020—S&P Global Ratings today took the rating actions listed above.
The downgrade reflects our expectation that economic recessions in many parts of the world, including in the U.S., will depress Hexion's EBITDA and cause credit metrics to deteriorate in 2020. This follows Hexion's weaker-than-expected performance in 2019.  We believe that Hexion's meaningfully lower debt and interest costs following its emergence from bankruptcy in 2019, along with the absence of near-term debt maturities, are credit positives. However, we expect Hexion to face very challenging macroeconomic conditions over the next 12 months and credit metrics weaker than expectations. The challenging operating conditions we now expect for 2020 were not factored into our previous rating. We now anticipate S&P Global Ratings-adjusted debt to EBITDA will be above 7x on a forward-looking (based on 2020 and 2021) weighted-average basis, compared to our previous expectation of about 5x. This is based on our expectation that earnings will fall in 2020 on lower demand, especially in the company's cyclical end markets. A key underlying assumption is economic activity will contract in the U.S. in 2020. We expect U.S. GDP growth will be flat at best. While lower oil prices could help preserve margins and improve liquidity, we expect it would only be a partial offset to top-line weakness, as the company tends to pass on most raw material fluctuations to its customers.
The negative outlook on Hexion reflects the potential for weaker earnings and credit metrics than what we considered in our ratings. Our base case assumes a contraction in the U.S. and European economies, which hurts demand for the company's products. Factoring in potential demand obstacles from a weaker macroeconomic environment, we expect S&P Global Ratings-adjusted debt to EBITDA of between 7x and 8x on a weighted–average, forward-looking basis. Despite these assumptions, we believe uncertainty related to the coronavirus impact on various sectors of the economy could portend a greater economic slowdown than we factor into our ratings. We reflect this uncertainty in our negative outlook.
We could lower the rating over the next 12 months if credit measures deteriorate such that debt to EBITDA approaches double digits. We could also lower the ratings if liquidity weakens and we believe sources of funds will decline below 1.2x uses or that the company has no prospects of generating positive free cash flow.
We could revise our outlook to stable over the next 12 months if Hexion's earnings weaken less than we anticipate or if we believe end markets could bounce back in a short period so that debt to EBITDA improves from our base case with no prospects for weakening. We could raise the rating over the next year if the company's business strength materially improves and performance exceeds our expectations, improving debt to EBITDA below 6.5x on a sustained basis. We would also expect liquidity sources to remain above 1.2x uses.
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