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Rating Action:

Moody's assigns B1 rating to PQ Corporation's proposed term loan; affirms existing ratings and maintains stable outlook

19 May 2021

New York, May 19, 2021 -- Moody's Investors Service, ("Moody's") has assigned a B1 rating to PQ Corporation's (PQ) proposed $900 million senior secured term loan. PQ will apply the proceeds to redeem $440 million of the approximately $672 million outstanding first lien term loan due 2027 and repay the entire $460 million outstanding incremental first lien term loan due 2027. Moody's expects to withdraw the B1 rating on the incremental first lien term loan upon closing. Moody's also affirmed the B1 Corporate Family Rating (CFR), the B1-PD Probability of Default Rating (PDR), B1 rating on the remaining first lien term loan and the B3 rating on the senior unsecured notes. The SGL-2 Speculative Grade Liquidity (SGL) rating remains unchanged. The outlook is stable.

The assigned rating is subject to the transaction closing as proposed and receipt and review of the final documentation.

"The affirmation considers the proposed transaction as contemplated and subsequent debt repayment once the Performance Chemicals proceeds are received that will result in pro forma leverage that is appropriate for the current B1 rating," said Domenick R. Fumai, Vice President and lead analyst for PQ Corporation.

Assignments:

..Issuer: PQ Corporation

....Senior Secured Term Loan B, Assigned B1 (LGD3)

Affirmations:

..Issuer: PQ Corporation

.... Corporate Family Rating, Affirmed B1

.... Probability of Default Rating, Affirmed B1-PD

....Senior Secured Bank Term Loan B, Affirmed B1 (LGD3)

....Senior Secured Bank Term Loan B1, Affirmed B1 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD6 from LGD5)

Outlook Actions:

..Issuer: PQ Corporation

....Outlook, Remains Stable

RATINGS RATIONALE

The rating affirmation reflects expectations that PQ Corporation's revised capital structure, credit metrics and business profile will continue to be supportive of the B1 rating. PQ is in the process of divesting non-core businesses, substantially reducing its size and diversity, and focusing on catalysts and sulfuric acid, which are higher margin and have higher intrinsic growth rates. As part of this process, PQ is revising its capital structure. Proceeds from the proposed $900 million term loan will redeem $440 million of the $672 million outstanding term loan due 2027 and repay the entire $460 million outstanding incremental term loan due 2027. Following the closing of the sale of PQ's Performance Chemicals segment, the company will apply a portion of the estimated $995 million in proceeds to repay the remaining outstanding $231 million term loan due 2027 and redeem the entire $295 million outstanding 5.75% senior unsecured notes due 2025. PQ has also indicated it will use the proceeds from the sale to pay a special dividend of $2.50-$3.25 per share. Once the sale is completed, PQ Corporation will change its name to ecovyst Inc.

PQ's B1 rating is supported by leading market positions in Refining Services, which includes sulfuric acid regeneration and virgin sulfuric acid production, and Catalysts Technologies, a provider of catalysts used in the growing polyethylene and fuel and emission control industries. The rating further benefits from long-term take-or-pay contracts within Refining Services that provide future revenue and earnings visibility and cost pass-through mechanisms in a majority of contracts that insulate the company from raw material price fluctuations. PQ also enjoys good free cash flow generation.

The rating is constrained by the company's continued elevated leverage post the divestiture of Performance Chemicals. Moody's projects pro forma leverage (Debt/EBITDA) of approximately mid-5x, including Moody's standard adjustments, in FY 2021 and to improve towards 5.0x in FY 2022. PQ's rating also considers its small scale following the sale of Performance Materials and Performance Chemicals and reduced business and geographic diversity. Moreover, the business profile is offset by exposure to several economically sensitive end markets such as refining, autos, and construction. Despite the recent secondary offering of 12.5 million shares of common stock by CCMP and INEOS, which reduced sponsor ownership to approximately 38% and 20%, respectively, significant ownership concentration by private equity remains a limiting factor to PQ's rating. Following the two special dividend distributions, Moody's believes capital allocation is also now more balanced towards both debt repayment and shareholder distributions.

The SGL-2 Speculative Grade Liquidity rating (SGL) reflects good liquidity to support operations. As of March 31, 2021, PQ had approximately roughly $55 million of cash on the balance sheet and $106 million available under its ABL facility. The ABL has a springing financial maintenance covenant - the only financial maintenance covenant. There are no financial covenants under the term loan. Subsequent to the sale of the Performance Chemicals business, the cash balance is expected to be over $100 million, which will compensate for the expected reduction in the ABL to roughly $100 million.

PQ's debt capital is comprised of an unrated $250 million ABL, a $947.5 million first lien senior secured term loan B maturing February 2027 ($672 million outstanding), $650 million first lien senior secured term loan ($460 million outstanding) and $295 million of senior unsecured notes maturing in 2025. The assigned B1 rating to the proposed $900 million first lien term loan and remaining $231 million first lien term loan, the same as the CFR, reflects the preponderance of secured debt in the capital structure with a relatively small amount of unsecured debt to absorb potential losses in the event of a default. Moody's expects to withdraw the existing B1 rating on the incremental term loan upon closing of the financing. The B3 rating on the senior unsecured notes reflects their subordinated position to the secured first lien term loans. Pro forma for the transaction, PQ will have the $900 million proposed first lien term loan, $231 million remaining under the existing incremental first lien term loan and $295 million of senior unsecured notes. After the closing of the Performance Chemicals sale, the capital structure is expected to solely consist of the $900 million new first lien term loan.

The stable outlook assumes that longer-term, a combination of modest EBITDA growth and continued free cash flow generation will enable the company to maintain retained cash flow-to-debt in excess of 10% (RCF/Debt) and generate at least $40 million of free cash flow before the special dividend in 2021. The outlook also incorporates expectations for limited bolt-on debt-financed acquisitions and adherence to conservative financial policies.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade the rating with expectations for sustained adjusted financial leverage below 4.0x and retained cash flow-to-debt sustained above 15%, and demonstration of organic growth to mitigate potential shareholder friendly actions. Moody's would also need to see revenue growth towards $800 million excluding the Zeolyst JV sales and increased business diversity before considering an upgrade. Moody's could downgrade the rating with expectations for sustained adjusted financial leverage above 5.5x, negative free cash flow or retained cash flow-to-debt below 10%, a change in financial policies, including a large debt-financed acquisition, could also have negative rating implications.

ESG CONSIDERATIONS

Moody's considers environmental, social and governance considerations in PQ's rating. Environmental risks for PQ are considered moderate as a specialty chemical company. In particular, many of their products help companies adhere to emissions standards or provide services that promote sustainability for their customers. Although the board has a majority of independent directors, PQ's governance is viewed as weak for a public company as CCMP and INEOS own the majority of the shares and, therefore, control the appointment of directors. Until CCMP and INEOS reduce their ownership of PQ below 30% and all directors associated with these firms are removed from the board, this issue will slow any improvement in the company's rating.

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Malvern, PA, PQ Corporation, the indirect wholly-owned subsidiary of PQ Group Holdings Inc., is a leading provider of regenerated and virgin sulfuric acid, silica catalysts and technologies. The company operates in two segments: Ecoservices and Catalyst Technologies, which includes the Zeolyst Joint Venture. CCMP Capital Advisors, LP (CCMP) purchased a stake in the company in late 2014 and holds a 38% interest in the company. INEOS Ltd. is the other significant owner with a 20% stake and the remainder is publicly held. PQ began trading as a public company in September 2017 and reported pro forma sales of $496 million in the fiscal year-ended December 31, 2020.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Domenick Fumai
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

Glenn B. Eckert
Associate Managing Director
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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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