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Rating Action:

Moody's assigns Ba2 CFR to W. R. Grace; outlook stable

Global Credit Research - 09 Jan 2014

First rating assignment since W. R. Grace's April 2001 US Chapter 11 bankruptcy filing

New York, January 09, 2014 -- Moody's Investors Service has today assigned a corporate family rating (CFR) of Ba2 and a probability of default rating (PDR) of Ba2-PD to W. R. Grace & Co.--Conn. (Grace). Concurrently, Moody has assigned a Ba2 rating to Grace's proposed $1.55 billion first-lien senior secured credit agreement. The first-lien senior secured credit agreement consists of (1) an equivalent $400 million revolving credit facility due 2019; (2) an equivalent $900 million term loan facility due 2021; and (3) a $250 million delayed-draw term loan due 2021. Moody's has also assigned an SGL-2 speculative grade liquidity rating. The outlook on the ratings is stable. These ratings assume that the terms of the final executed agreements will be substantially similar to the draft documentation provided.

This is the first time that Moody's has assigned ratings to Grace since it filed for reorganization under Chapter 11 of the United States Bankruptcy Code on 2 April 2001. Grace recently announced that it expects to get approval for the final pre-bankruptcy claim settlement at a bankruptcy court hearing scheduled for 29 January 2014. Grace has also announced a pending placement of $1.55 billion in senior secured debt (the transaction) to fund an approved, post-bankruptcy, reorganisation plan.

Moody's understands that the proceeds from the proposed transaction will primarily be used to (1) fund Grace's initial contributions to two ongoing asbestos-related claims trusts; (2) pay pre-bankruptcy unsecured debt claims, with accrued interest; and (3) pay related transaction fees and expenses.

Moody's expects Grace to emerge from bankruptcy on or around 31 January 2014, assuming approval from the bankruptcy court on the final settlement and the successful execution of the debt placement transaction.

"The assigned Ba2 CFR reflects Grace's moderate financial leverage and our expectation that after emerging from bankruptcy the company will face several potential threats to its credit profile, including ongoing asbestos-related payments, legacy reputational concerns, and newly energized shareholders," says Anthony Hill, a Moody's Vice President - Senior Analyst and lead analyst for Grace.

Assignments:

..Issuer: W.R. Grace & Co.-Conn.

.... Corporate Family Rating, Assigned Ba2

.... Probability of Default Rating, Assigned Ba2-PD

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

....Senior Secured Bank Credit Facilities, Assigned Ba2 LGD3, 40 %

RATINGS RATIONALE

The Ba2 CFR assigned to Grace reflects the company's moderate financial leverage, which Moody's expects will be around 3.5x debt/EBITDA (on a Moody's-adjusted basis) for the financial year-end December 2013 and pro forma for the transaction. While Moody's expects the company to reduce leverage over the coming quarters, Grace is significantly exposed to a challenged US construction market and a weak European chemicals trading environment that is expected to exist through at least 2014.

The rating also reflects Moody's cautious view of the company's lack of operating history outside of bankruptcy court protection. The Grace corporate bankruptcy has been one the longest in US history. For over 12 years, Grace has received court protection from the demands of claimants, creditors, and shareholders. While in bankruptcy, Grace's acquisition ambitions were modestly constrained. Moody's believes that when Grace emerges from bankruptcy, the company will face extraordinary distractions that may dilute management's attention. These concerns will include cash management for the funding of ongoing asbestos- and environmental-related obligations through at least 2033; enhanced corporate governance to offset legacy reputational issues; an expanding business model that calls for ongoing acquisitions; and newly energized shareholder demands. Each of these areas represents a potential threat to Grace's post-bankruptcy credit profile.

Grace has three segments, the largest of which is the catalyst business, which generate over two-thirds of its total EBITDA. Grace is a leading global provider of refinery catalysts. Moody's expects continued global growth in demand for refined oil products, such as transportation fuels, over the coming years, especially in the emerging markets. As a result, Moody's also expects demand for refining catalysts to remain solid over the coming years, making it necessary for Grace to ensure sufficient investments in its current plants and its global expansion projects in order to maintain its competitive position and an adequate level of supply for its customers.

Moody's believe that the new threats to the company's credit profile are partially offset by its moderate leverage and elevated free cash flow. The rating agency is concerned that upon emergence management may make shareholder remuneration a higher priority or that other exogenous events may delay deleveraging. Additionally, Grace's global competition in the refinery catalyst business are larger and have more financial flexibility; companies such as Royal Dutch Shell Plc (Aa1 stable), BASF (SE) (A1 stable), LyondellBasell Industries N.V. (Baa1 stable), and Albemarle Corporation (Baa1 stable).

Furthermore, Moody's believes that the move to lighter refinery feedstocks in US combined with the economic slowdown in Europe (primarily affecting the construction segment) will pressure top-line revenue generation and profitability at Grace.

Yet for all of these concerns, the Ba2 CFR also reflects Grace's strength as a leading specialty chemicals producer for the global refining catalyst, packaging, and construction industries, with a track record of maintaining solid market share positions across a diverse product line. The rating also acknowledges Grace's proven ability to generate solid cash flows through all global economic cycles, and its resilient business model, solid operating performance, and ability to pass through material and production costs while simultaneously improving marginal income. Ultimately, the rating agency expects Grace's operating performance to be solid over the coming quarters/ years.

Moody's believes that Grace's liquidity, pro forma the transaction, will comfortably cover its near-term requirements. Pro forma for the transaction and by financial year-end December 2014, Moody's expects the company to exhibit an adjusted cash balance of approximately $475 million. Internally generated cash flow and the undrawn $400 million revolving credit facility will cover the company's ongoing basic cash needs, such as debt service and amortisation, working capital needs, expected capital expenditures (including expansionary capital investments), and any legacy liability payments.

Using Moody's Loss Given Default (LGD) methodology, the PDR is equal to the CFR, based on a 50% recovery rate, primarily due to the covenant-lite structure of the senior secured credit facilities. Moody's also used this methodology to assign a Ba2 rating to the revolving credit facility and other first-lien senior secured credit facilities. In Moody's opinion, the level of US-based collateral backing Grace's US-issued debt is not adequate to warrant any upward notching of the ratings of the first-lien senior secured credit facilities. As a result, these ratings are also equal to the CFR.

OUTLOOK

The stable outlook reflects Moody's expectation that Grace's post-bankruptcy credit metrics will improve over the coming quarters, in line with the rating agency's expectation of continued solid operational performance.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider upgrading Grace's rating if the company (1) has no new or significant claims related to legacy liabilities made against it; (2) maintains conservative financial policies with respect to acquisitions and shareholder distributions; and (3) continues to meet, or exceed, Moody's operational performance expectations post bankruptcy and over the coming quarters. Quantitatively, Moody's would consider upgrading Grace's ratings if the company's Moody's-adjusted (1) debt/EBITDA ratio is around 3.0x; (2) EBITDA/interest expense ratio is above 6.0x; and (3) retained cash flow/debt ratio is above 20% -- all on a sustained basis.

Conversely, while Moody's does not expect downward pressure on the rating, the rating agency could assess the potential for a downgrade if Grace's financial policies, with respect to acquisitions and shareholder distributions, become aggressive; or the company's operating performance exhibits any sign of sustained weakness. Quantitatively, Moody's would consider downgrading Grace's ratings if the company's Moody's-adjusted (1) debt/EBITDA ratio increases to around 4.0x; (2) EBITDA/interest expense ratio falls below 4.0x; or (3) retained cash flow/debt ratio falls to around 15%.

PRINCIPAL METHODOLOGY

The principal methodology used in rating W. R. Grace & Co.--Conn. was the Global Chemicals Industry 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.

Headquartered in Maryland, USA, W. R. Grace & Co. is the ultimate parent of W. R. Grace & Co.--Conn. Grace is a manufacturer of specialty chemicals and materials with operations in over 40 countries. Grace has three major reporting segments: (1) catalysts technologies (40% of 2012 revenue); (2) materials technologies (27%); and (3) construction products (33%). Approximately 72% of the company's sales are generated outside of the US. Moody's projects Grace's financial year-end December 2013 revenues and Moody's-adjusted EBITDA, pro forma for the transaction, will be approximately $3.0 billion and $716 million, respectively.

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.

Anthony Hill
Vice President - Senior 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

Brian 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 Ba2 CFR to W. R. Grace; outlook stable
No Related Data.

 

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