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Rating Action:

Moody's assigns B2 to Potters Holdings II, LP; rates new debt

14 Apr 2011

Approximately $302.5 million of new rated debt affected

New York, April 14, 2011 -- Moody's Investors Service assigned a B2 Corporate Family Rating (CFR) to Potters Holdings II, LP (Potters), Ba3 ratings to its $40 million revolver due 2016 and $150 million six year first lien term loan, and a Caa1 rating to its $112.5 million six and one-half year second lien term loan. Proceeds from the financing will be distributed to its parent, PQ Corporation (PQ), in order to pay down existing PQ debt. The ratings are subject to a review of final documentation. These are first-time ratings for the company. The rating outlook is stable. The following summarizes the ratings activity:

Potters Holdings II, LP

Corporate Family Rating -- B2

Probability of Default Rating -- B2

$40 million senior secured revolving credit facility due 2016 -- Ba3 (LGD2, 29%)

$150 million senior secured (first lien) term loan due 2017 -- Ba3 (LGD2, 29%)

$112.5 million senior secured (second lien) term loan due 2017 -- Caa1 (LGD5, 80%)

Outlook: Stable

RATINGS RATIONALE

The B2 CFR reflects Potters' elevated leverage (pro forma Debt / EBITDA ratio would have been 6.5x as of December 31, 2010, including Moody's standard analytical adjustments that add $11 million to debt for unfunded pension obligations and $22 million to debt for operating leases, as well as corporate allocations and other expenses included in the audited financial statements that Potters believes can be greatly reduced), negative free cash flow generation during the last economic downturn, narrow product portfolio, a limited number of end markets and modest size. While we recognize that the safety--related products manufactured by Potters have not been impacted to date by spending cuts or tight state and municipal budgets, we view this as a meaningful risk over the next several years in North America and Europe.

The ratings are supported by relatively stable sales volumes historically, strong margins, Potters' leading positions in the highway safety (number one in North America, Europe, Asia, and Latin America) and EGM markets (number one or two in all industry segments), wider product offerings versus competitors, a reasonably diverse customer base and longstanding relationships with its customers (all top ten customers have been with the company for 10+ years). Other credit positives include Potters' significant geographic footprint (25 facilities in 11 countries), operational diversity, US federal and state highway construction guidelines supporting use of its products and the fact that Potters' glass beads make up a low percentage (10-12%) of the total cost of the highway striping in which they are included. The B2 CFR incorporates Moody's expectation that there will be meaningful restrictions on further dividends to PQ until leverage falls below 4x or some other equally restrictive covenant, such that the vast majority of free cash flow will be used to pay down debt.

The stable outlook reflects Moody's expectation that Potters will generate steady cash flows, experience modest growth in the US and Europe and reduce its leverage. The ratings have limited upside at the current time due to the relatively heavy debt burden and the aforementioned budgetary concerns. The ratings could experience downward pressure should numerous states (or contractors of said states) reduce or eliminate their purchasing of glass beads from Potters, if margins were to dip below historical levels, or if the company failed to successfully generate positive free cash flow going forward.

The principal methodology used in rating Potters Holdings II, LP was the Global Chemical Industry Methodology, published December 2009. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009.

Potters Holdings II, LP, headquartered in Malvern, Pennsylvania, is leading provider of glass spheres for highway and safety markings and engineered glass materials (EGM). Approximately 80% of revenues are derived from the highway safety business and EGM accounts for the remaining 20%. Potters is a wholly-owned subsidiary of PQ Corporation (PQ), a manufacturer of inorganic specialty chemicals, including sodium silicate, silicate derivatives and catalysts. PQ was purchased by Carlyle Partners IV, LP, a private investment fund affiliated with The Carlyle Group, from CCMP Capital Advisors, LLC on July 30, 2007. Potters' revenues for the year ended December 31, 2010, were $279 million, of which approximately one-third was sourced outside of North America.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
James Wilkins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
John Rogers
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns B2 to Potters Holdings II, LP; rates new debt
No Related Data.
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