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Rating Action:

Moody's assigns B3 ratings to Hexion's proposed senior secured notes

31 Mar 2015

New York, March 31, 2015 -- Moody's Investors Service assigned a B3 rating to the $315 million senior secured notes due 2020 of Hexion Inc. Proceeds from the proposed notes are expected to be used for general corporate purposes, which would include redeeming $40 million of debentures due 2016. Despite an improvement in liquidity and near term profitability improvement due to lower petrochemical prices, Moody's remains concerned over the potential for a meaningful decline in profitability from its propants business, the expected lack of pricing power in epoxies, the company 's high leverage and elevated capital spending on new capacity. The outlook is negative.

"If Hexion is successful in issuing at least $300 million in new notes and demonstrates improved profitability in the first quarter of 2015, we would likely move the outlook to stable," stated John Rogers, Senior Vice President at Moody's.

Rating assigned:

..Hexion Inc.

.Senior Secured First-Priority Notes due 2020, Assigned B3

RATINGS RATIONALE

Hexion's Caa1 CFR reflects continued weak financial performance and elevated leverage with Debt/EBITDA of over 10x, weak EBITDA margins (less than 10%), exposure to volatile commodities and negative free cash flow. New capacity additions should be somewhat offset by increased free cash flow due to lower commodity prices in 2015 but that free cash flow will be negative by over $70 million. MSC's rating does benefit from its size (roughly $5 billion of revenue), meaningful product and operational diversity and a seasoned management team.

The company credit metrics continue to be adversely affected by ongoing weakness in base epoxy resins and intermediates, and weaker margins in its energy end markets (relative to 2011). Despite improvements in Forest Products, good volume growth in epoxy resins for wind turbine blades, propants for shale oil production and triazine (used to remove sulfur from oil and natural gas), Hexion's 2014 EBITDA is up less than 5% versus its December 31, 2013 year-to-date performance. This results in FYE December 31, 2014 leverage (Total Debt/EBITDA including Moody's adjustments) that remains unusually high at over 10x. In addition, Retained Cash Flow/Total Debt is very weak at just over 1% and free cash flow was negative by over $200 million as the company invested in acquisitions and additional capacity.

The aforementioned metrics reflect Moody's Global Standard Adjustments which include the capitalization of pensions ($264 million) and operating leases ($219 million).

The negative outlook reflects Hexion's extremely weak financial metrics and negative free cash flow in 2015. If Hexion fails to maintain at least $400 million of liquidity Moody's would likely lower its rating further. Succesful issuance of the new notes would make it highly unlikely that liquidity would fall below $400 million in 2015 or 2016. If TotalDebt/EBITDA declines sustainably below 8x and Retained Cash Flow/Total Debt rises above 3%, Moody's would consider raising MSC's rating.

Hexion's Speculative Grade Liquidity Rating of SGL-3 reflects the potential for liquidity to erode in 2015 in the absence of this debt issuance. At year-end 2014 liquidity was $487 million as lower methanol and phenol prices positively impacted cash flow despite heavy capital spending. In 2015, Moody's expects free cash flow to be negative by close to $70 - 90 million.

At year end 2014, Hexion had drawn by $60 million on its $400 million ABL revolving credit facility ($266 million of borrowings available less $37 million of letters of credit) and roughly $156 million in unrestricted cash. The ABL facility will not have a financial covenant until availability falls below 10%. However, given the generous terms of the covenant calculation, the company remains well in compliance with this covenant.

The principal methodology used in this rating was the Global Chemical Industry Rating Methodology published in December 2013. 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.

Hexion Inc., is a major producer of thermoset resins (epoxy, formaldehyde and acrylic). The company is also a supplier of specialty resins sold to a diverse customer base as well as a producer of commodities such as formaldehyde, bisphenol A (BPA), epichlorohydrin (ECH), versatic acid and related derivatives. Revenues are approximately $5.1 billion. MSC is an indirect wholly-owned subsidiary of Momentive Performance Materials Holdings LLC (MPMH, unrated), headquartered in Columbus Ohio. The majority owner of MPMH is an affiliate of Apollo Management.

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.

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.

John P Rogers
Senior Vice President
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

Brian B Oak
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 B3 ratings to Hexion's proposed senior secured notes
No Related Data.
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