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Rating Action:

Moody's affirms Momentive's B2 CFR, assigns B1 to its new term loan; outlook stable

02 Apr 2019

New York, April 02, 2019 -- Moody's Investors Service ("Moody's") has affirmed Momentive Performance Materials Inc.'s (Momentive) B2 Corporate Family Rating (CFR), B2-PD probability of default rating, and the ratings on the existing notes. At the same time, Moody's has assigned a B1 rating to Momentive's proposed $839 million first lien senior secured term loan. The rating outlook is stable.

The proceeds of the proposed term loan, along with other debt and equity capital, will be used to finance Momentive's acquisition by KCC Corporation (Baa2 under review for downgrade), SJL Partners LLC and Wonik QnC Corporation, and to repay the existing notes. Moody's will withdraw the ratings on the existing notes once they are repaid.

Rating assignment:

..Issuer: Momentive Performance Materials Inc.

....Senior Secured First Lien Term Loan due 2024, assigned B1 (LGD3)

Rating affirmation:

..Issuer: Momentive Performance Materials Inc.

....Corporate Family Rating, affirmed B2

....Probability of Default Rating, affirmed B2-PD

....Senior Secured First Lien Notes due 2021, affirmed B2 (LGD3)

....Senior Secured Second Lien Notes due 2022, affirmed Caa1 (LGD5)

Outlook Actions:

..Issuer: Momentive Performance Materials Inc.

....Outlook, Remains Stable

Rating withdrawal:

..Issuer: Momentive Performance Materials Inc.

....Speculative Grade Liquidity Rating, withdrew SGL-2

RATINGS RATIONALE

"The affirmation of Momentive's B2 CFR takes into account the company's improved earnings amid tight silicone supply, its initially high debt leverage following the acquisition and the potential of business synergies and cash generation under the new ownership," says Jiming Zou, Moody's Vice President and Lead Analyst for Momentive.

Moody's expects the tight global silicone supply will likely keep Momentive's earnings elevated the next one or two years, despite a slowing economy, and capacity additions announced by Dow, Shin-Etsu and Wacker Chemie that will potentially rebalance the market and pressure Momentive's profits beginning in 2020 and thereafter. Increasing global demand, capacity closures and production outages caused silicone prices to surge and greatly improved margins in the last four years. Momentive has also benefited from its growing portfolio of high-margin specialty silicones and silanes products. In 2018, the company's reported segment EBITDA rose to about $400 million, up from $293 million a year ago.

However, Momentive's CFR is constrained by its initially high debt leverage after the acquisition. Gross debt will increase by about $340 million, resulting in a 5.7x adjusted pro forma Debt/EBITDA (including pension and lease adjustments and excluding quartz business which will be separated under the new ownership), versus 4.2x at the end of 2018. Momentive is likely to improve its leverage to low 5x in the next two years, based on its current earnings and cash generation. While we believe the silicone industry has seen its cyclical peak and new capacities are being built, contributions from specialty silicone products, potential sales synergies with KCC and its new silicone capacities should facilitate cash flow generation and deleveraging at Momentive.

Fundamentally, Momentive has been a major global producer of silicone products, with a track record of maintaining market share positions across a diverse product portfolio. However, the company remains exposed to the highly competitive silicone market and competes against other larger revenue base companies with partial backward integration. Its adjusted EBITDA margin improved to about 15.5% in 2018, from 13.3% in 2017, but remains low compared to its larger competitors -- Dow and Wacker. Momentive has recently rationalized its siloxane production in Germany and transformed its business towards specialty silanes, automotive clear coats, optical displays and LSR that will strengthen its earnings.

KCC's investment in Momentive will offer certain operational benefits to Momentive, such as cross-sales opportunities in Korea and potential procurement savings. KCC's stronger credit profile and guarantee to Momentive's $839 million term loan A (subscribed by Korean investors, not rated by Moody's) also indicate KCC's ability and willingness to provide support to Momentive in the event it is required. However, Momentive's B2 CFR has not factored in any explicit support uplift, given the presence of a private equity investor—SJL, which will ultimately hold 50% less one share in Momentive, has a strong influence on financing decisions and may exit at the same time of the term loan maturity.

Liquidity is good with $260 million cash on hand and $300 million undrawn ABL facility as of December 31, 2018. We expect the company to reduce its capital expenditure and generate positive free cash flow in 2019. The new $300 million ABL facility, similar to the existing one, will be governed by a maintenance covenant test; minimum fixed charge coverage ratio of 1.0x that applies only if availability is less than the greater of: 10% of the lesser of the borrowing base and $25 million. KCC's guaranteed term loan A has also a net leverage maintenance covenant with sufficient headroom. We expect Momentive to remain in compliance with its covenants.

Momentive's proposed first-lien senior secured term loan is rated B1, one notch above its B2 CFR, given its seniority against KCC's guaranteed term loan A and its first-lien on substantially non-ABL assets and second-lien on all ABL assets. The new ABL facility, which has a first-lien on all current assets, is not rated.

The stable outlook reflects the expectation of a favorable operating environment in the next one to two years and the company's continuous effort to improve is earnings and launch more value-added silicone products to fend off competition.

Moody's would consider upgrading Momentive's ratings if the company is able to improve its profitability with an EBITDA margin above 15%, generate consistently positive free cash flow of over $50 million per annum applied to debt reduction, and improve its debt/EBITDA ratio sustainably below 5.0x. Moody's would also consider a rating upgrade, if KCC were to raise its stake in Momentive or fully integrate its existing silicone operations into Momentive.

Conversely, Moody's would consider downgrading Momentive's ratings if the company's credit metrics deteriorate as a result of weakening operational performance or a change in its financial policy. Should its debt/EBITDA ratio rise above 6.0x, its EBITDA margins fall below 10%, or it fails to generate positive free cash flow, a rating downgrade could be considered.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Momentive Performance Materials Inc., based in New York, US, is one of the largest global producer of silicones and silicone derivatives. The company operates two primary businesses, silicones, which account for approximately 92% of revenues; and quartz. Silicones, or more accurately, polymerized siloxanes or polysiloxanes, are mixed inorganic-organic polymers that are used in a wide variety of industrial and consumer applications including agriculture, automotive, electronics, healthcare, personal care, textiles, and sealants. KCC Corporation (Baa2 under review for downgrade), SJL Partners LLC, and Wonik QnC Corporation announced in September 2018 that they have agreed to acquire MPM Holdings Inc., the holding company of Momentive, for approximately $3.1 billion. In 2018, Momentive generated $2.7 billion in revenues.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jiming Zou
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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