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Rating Action:

Moody's assigns B2 CFR to Cornerstone; proposed secured notes rated B3

01 Mar 2013

Approximately $220 million of new debt rated

New York, March 01, 2013 -- Moody's Investors Service assigned to Cornerstone Chemical Company ("Cornerstone") a B2 Corporate Family Rating ("CFR") and B3 rating to the company's $220 million senior secured notes due 2018. Proceeds from the offering will be used to refinance existing debt, fund a sponsor dividend, and pay related fees and expenses. The rating outlook is stable.

"Cornerstone has done well in transitioning to a standalone entity since its carve-out from Cytec about two years ago, but will need to start generating free cash flow to maintain the assigned B2 CFR," said Ben Nelson, Moody's lead analyst for Cornerstone.

Assignments:

..Issuer: Cornerstone Chemical Company

....Corporate Family Rating, Assigned B2

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

....Senior Secured Notes due 2018, Assigned B3 (LGD4 58%)

..Outlook, Stable

RATINGS RATIONALE

The assigned ratings are first-time ratings for Cornerstone, and subject to Moody's review of final terms and conditions of the proposed dividend recapitalization transaction.

The B2 CFR is weakly positioned due to single site operating risk, reliance on volatile commodity chemicals, historical lack of cash flow generation, and the lack of cash equity after the proposed dividend. Pro forma financial leverage is relatively modest for the rating category, but capital intensity limits the company's prospective ability to generate free cash flow. Cost advantages associated with synergistic manufacturing processes, long-term customer relationships, formula-based customer contracts, diverse end markets, and a good liquidity position support the rating. The rating also recognizes Cornerstone's successful transition to a standalone entity since its carve-out from Cytec in early 2011.

Cornerstone produces acrylonitrile, melamine, and sulfuric acid, as well as various co-products, out of a single manufacturing complex located on the Mississippi River near New Orleans, Louisiana. The company benefits from logistical advantages associated with the site, and operating cost offsets provided by customer facilities located on the site, steam generated from its own operations and spent acid returned from an on-site tenant. Tenants also provide a source of demand for some of Cornerstone's intermediate chemicals. The economics of the complex are reliant on these various interdependencies and the impact of an operational disruption, even if limited to certain units, could have a meaningful adverse impact on profitability. Indeed, single site risk is a principal rating constraint and necessitates that the company maintain strong credit measures for its rating category.

Moody's expects low-cost natural gas will provide domestic petrochemical companies with a moderate competitive advantage versus international competitors. Notwithstanding solid domestic merchant market positions, Moody's believes that the company has limited market power and essentially is a price taker which generates commodity-like profit margins. This heightens the importance on formula-based contracts with pass-through arrangements to help maintain profitability. Cornerstone has these contracts for most acrylonitrile and sulfuric acid production, but is more exposed to market conditions with respect to melamine. This segment saw tightening during the past year due to the start-up of new capacity in the industry. Moody's anticipates continued volatility in melamine margins, though ongoing recovery in the key housing end market and regulatory support should tighten the global supply/demand balance.

Moody's views the proposed dividend recapitalization transaction as aggressive in part because it removes all of the cash equity that the private equity sponsor used to capitalize the initial transaction two years ago, and due to concerns that the additional debt could result in stressed credit metrics in a downturn scenario. That said, credit measures are relatively strong for the rating category on a pro forma basis for the twelve months ended November 30, 2012. Moody's estimates financial leverage in the high 3 times Debt/EBITDA and interest coverage near 3 times EBITDA/Interest. Capital intensity limits prospects for free cash flow, which Moody's expects will be roughly breakeven in 2013 and with solid execution should improve in 2014. The rating assumes that the company will apply some of its cash flow to credit-friendly purposes, such as repaying debt and improving liquidity, in advance of a downturn.

The stable rating outlook assumes that Cornerstone will continue to improve its operations, stay on track to generate free cash flow in the mid single digit range in 2014, and maintain at least $60 million of available liquidity. Moody's could downgrade the ratings with expectations for financial leverage in excess of 5 times, sustained negative free cash flow, or deterioration in liquidity. An adverse operational event or upsizing the transaction to facilitate a larger sponsor dividend could also have negative rating implications. Upward rating momentum is limited at present. Moody's could upgrade the rating if Cornerstone reduces absolute debt levels and builds up a substantial liquidity position to help offset the operating risk associated with its single site profile.

For more information, please refer to the Credit Opinion to be posted to moodys.com.

The principal methodology used in this rating was the Global Chemical Industry published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Cornerstone Chemical Company ("Cornerstone") produces petrochemicals such as acrylonitrile, melamine, and sulfuric acid. Private equity firm H.I.G. Capital has owned the company since its carve-out from Cytec Industries in February 2011. Headquartered in Waggaman, La., Cornerstone generated $597 million of revenue for the twelve months ended November 30, 2012.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Benjamin Nelson
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns B2 CFR to Cornerstone; proposed secured notes rated B3
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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