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Rating Action:

Moody's assigns Ba3 rating to Hexion's 1st lien notes; MSC's outlook changed to stable

05 Mar 2012

New York, March 05, 2012 -- Moody's Investors Service assigned a Ba3 rating to the guaranteed senior secured first lien notes due 2020 of Hexion U.S. Finance Corp (HFC), a wholly owned subsidiary of Momentive Specialty Chemicals Inc. (MSC). Proceeds from the notes will be used to repay amounts outstanding under MSC's Term Loan B maturing in May 2013. Moody's also assigned Ba3 ratings to MSC's amended and extended revolving credit facility due 2014 and Term Loan B due 2017. As part of this actions Moody's also affirmed all of MSC's other ratings (CFR at B3) and moved the outlook to stable from positive due to the company's weak performance in the fourth quarter of 2011 and the expectation for a slow recovery in financial performance in 2012.

"With this refinancing MSC will have refinanced or extended the maturities on the vast majority of the debt that was originally slated to mature prior to 2015," stated John Rogers, Senior Vice President at Moody's. "There is roughly $120 million of debt maturing at the end of 2014, which can easily be repaid from the revolver or operating cash flows; $150 million of short term debt at international subsidiaries will likely be rolled over on an ongoing basis."

Moody's affirmed MSC's other ratings (Corporate Family Rating at B3) and adjusted the LGD assessments to reflect the slight increase in debt as a result of this transaction.

RATINGS RATIONALE

MSC's B3 Corporate Family Rating reflect its elevated leverage, exposure to volatile commodities and the lack of consistent free cash flow generation. The rating benefits from its size, product and operational diversity, a seasoned management team that has demonstrated the ability to successfully manage through difficult end market conditions and a growing presence in Asia and Latin America (although North America and Europe still account for over 75% of sales).

The Ba3 rating on the new notes and extended term loan reflect their position in the capital structure relative to almost $2.2 billion of junior debt. The new notes will share the same collateral package as the other secured debt and rank pari passu with the term loan. Moody's noted that there is an intercreditor agreement between the first lien debt holders that allows the term loan debtholders to unilaterally make decisions on certain matters regarding the collateral, which could cause the notes to be subordinated to an asset based lending facility in the future.

The move to a stable outlook reflects the weakening of MSC's credit metrics in the fourth quarter of 2011 with Debt/EBITDA widening to 6.7x and Retained Cash Flow/Debt falling to 7%. Additionally, comments by the company on its fourth quarter conference call indicate that the first quarter of 2012 is off to a slow start suggesting that the first quarter will be weaker than the first quarter of 2011. To the extent that MSC can get Net Debt/EBITDA sustainably below 6.0x and Retained Cash Flow/ Net Debt above 8%, Moody's would likely raise its CFR to a B2.

Moody's noted that MSC had a large cash balance at the end of the year but a large portion of that cash will likely be plowed back into working capital as sales recover in the first and second quarter. The aforementioned metrics reflect Moody's Global Standard Adjustments which include the capitalization of pensions, operating leases and the inclusion of roughly $300 million of holdco debt maturing in 2014, which will likely be refinanced over the next year once earnings have improved.

Moody's stated that there was limited downside to the rating at the current time as the company's liquidity and lack of debt maturities have substantially reduced the probability of a default. Only some exogenous event that greatly reduces its cash balance and raises Net Debt/EBITDA back above 10x could trigger a downgrade.

Ratings assigned:

Hexion U.S. Finance Corp.

..Guaranteed senior secured first lien notes due 2022 at Ba3 (LGD2, 18%)

Momentive Specialty Chemicals Inc.

..Amended and extended guaranteed senior secured revolver due 2014 at Ba3 (LGD2, 18%)

..Amended and extended guaranteed senior secured term loan due 2017 at Ba3 (LGD2, 18%)

Ratings affirmed:

Momentive Specialty Chemicals Inc

..Corporate Family Rating at B3

..Probability of Default Rating at B3

..Guaranteed senior secured revolver due 2013* at Ba3 (LGD2, 18%)

..Guaranteed senior secured term loan due 2013* at Ba3 (LGD2, 18%)

..Guaranteed senior secured term loan due 2015* at Ba3 (LGD2, 18%)

..Guaranteed senior secured 1.5 lien notes due 2018 at B3 (LGD4, 52%)

..Guaranteed senior secured second lien floating rate notes due 2014 at Caa1 (LGD5, 77%)

..Guaranteed senior secured second lien fixed rate notes due 2014 at Caa1 (LGD5, 77%) *

..Senior unsecured notes at Caa2 (LGD6, 91%)

*: These ratings will be withdrawn upon successful completion of this transaction.

The principal methodology used in rating Momentive Performance Material Inc was the Global Chemical Industry rating methodology 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.

Momentive Specialty Chemicals, Inc., headquartered in Columbus, Ohio, is a leading producer of thermoset resins (epoxy, formaldehyde and acrylic). The company is also a supplier of specialty resins for inks and specialty coatings 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.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

John 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

Steven Wood
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 Ba3 rating to Hexion's 1st lien notes; MSC's outlook changed to stable
No Related Data.
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