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Rating Action:

Moody's assigns Baa2 Issuer Rating to INVISTA

30 Jun 2020

New York, June 30, 2020 -- Moody's Investors Service, ("Moody's") assigned a new Issuer rating of Baa2 to INVISTA Equities, LLC's (INVISTA), a wholly owned subsidiary of Koch Industries, Inc. (Aa3, stable). The Baa2 is effectively a two notch upgrade from the CFR of Ba1, which is being withdrawn with this action. The higher rating reflects the improved asset base and capacity expansions following roughly five years of heavy capital investment and the resulting strengthened position in the nylon chain of products, particularly in the key nylon intermediate, adiponitrile (ADN). The upgrade also reflects the transition to a fully unsecured debt capital structure. The outlook on the ratings is stable.

"The capex program has strengthened the manufacturing footprint with key projects improving technology, efficiency, energy usage and ERP implementation," according to Joseph Princiotta, SVP at Moody's. "In addition, INVISTA has recently commenced construction of a worldscale ADN facility at its existing intermediate and nylon 6,6 facility in Shanghai, China -- ADN is an important nylon intermediate where INVISTA currently has the leading global market share and proprietary technology," Princiotta added.

Assignments:

..Issuer: INVISTA Equities, LLC

.... Issuer Rating, Assigned Baa2

Withdrawals:

..Issuer: INVISTA Equities, LLC

.... Probability of Default Rating, Withdrawn , previously rated Ba1-PD

.... Corporate Family Rating, Withdrawn , previously rated Ba1

Outlook Actions:

..Issuer: INVISTA Equities, LLC

....Outlook, Remains Stable

RATINGS RATIONALE

INVISTA's credit Profile is supported by a leading market share in the Nylon 6,6 chain, strong and geographically diverse manufacturing assets, leading technology, and good scale, as measured by 2019 revenues of $3.9 billion. Moreover, the company has improved its manufacturing base, technology and cost structure over the past half decade through investments in new capacity, plant optimization, technology upgrades, a global ERP system and expense reduction programs—as part of a large capex program aimed at optimizing its global footprint in nylon polymers and intermediates. These and other projects significantly bolstered its bottom line in the nylon 6,6, chain and contributed to improved results from increased volumes and margins in 2018 and 2019. However, results this year are expected to be significantly lower due to the coronavirus outbreak and its impact on key nylon 6,6 end markets.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The chemical sector in general, and the nylon chain subsector in particular have been affected by the shock, especially the auto OEM, electronics and certain industrial and consumer end markets given the sensitivity to auto production and economic activity. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

INVISTA is wholly owned by Koch Industries, Inc. (Aa3, stable) and recently established a unsecured revolving credit facility due 2024 with a subsidiary of its parent Koch Industries, Inc. There is no formal uplift in the ratings due to the Koch ownership, but Moody's believes as an affiliate of Koch, INVISTA benefits from the parent's liquidity and capital support and strong banking relationships.

Challenging factors in the credit include the narrow product profile with a pure-play focus on the nylon 6,6 integrated chain, the cyclical nature of these products, high exposure to the cyclical automotive OEM space, and lack of back integration into sometimes volatile petrochemical raw materials. A key raw material, butadiene, can at times exhibit price volatility due to the linkage with the crude oil price and to changes in the ethylene cracker feed slates. The growth of naphtha crackers in Asia the next three years is expected to allow for ample butadiene global supply.

The ratings are constrained by M&A risk, which could include large acquisitions. However, metrics are strong for the Baa2 providing some flexibility for acquisitions, while Koch has a good track record of using conservative balance sheet leverage at its subsidiary companies and providing acquisition equity capital for large strategic transactions.

INVISTA generates substantial retained cash flow, as dividends have been zero the last five years, with the exception of a one-time dividend in the 4Q19 with proceeds from the divestiture of the apparel and advanced textiles business. Free cash flow has also been strong and increasing in recent years with the wind down of the multi-year capex program and the resulting new capacity and improved efficiencies. However, with a major new ADN project underway in China by INIVSTA's Chinese subsidiary, capex will step up in 2020 and peak in 2021. Start-up is slated for 2022. Project construction costs are currently expected to be between $1,000 and $1,200 million, of which 80% can be financed with non-recourse debt though a secured RMB-denominated loan facility provided by a consortium of Chinese banks to INVISTA's wholly owned Chinese subsidiary, INVISTA Nylon Chemicals (China) , Co. Ltd . (not rated). The facility allows for a maximum borrowing of RMB 7,392 million (or ~$1,050 million). The remaining 20% of project cost will be an equity investment spread over three years from INVISTA.

INVISTA's metrics are strong for the Baa2 rating, with gross adjusted leverage at 0.5x as of LTM March 31, 2020 (on a Moody's adjusted basis). Total adjusted debt currently consists of pension and operating lease adjustments to debt and modest usage under its cash management agreement (CMA) with Koch. The CMA is used for liquidity and working capital purposes. Consolidated free cash flow will be negative in 2021 as total debt ramps up with borrowings related to the ADN construction project in China, which could reach $1,056 million when the facility is completed in 2022. But total consolidated gross adjusted leverage is expected to remain strong for the ratings below 2.0x.

ESG factors are not material to INVISTA's credit profile or ratings at this time. The company is exposed to environmental and social issues typical for large scale commodity chemicals companies. Governance-related risks are lower than most chemical companies based on the company's ownership by affiliates of Koch and the parent's long-term track record of conservatism.

Noteworthy environmental matters include a Consent Decree dating back to 2009 related to pre -acquisition activities by DuPont that require INVISTA to fund pollution control equipment designed to remedy DuPont's past, pre-closing noncompliance activities. Most of this work is completed, with the exception of work at the Victoria, Texas site. The steps necessary to satisfy the final obligations at Victoria have been agreed to with the EPA and INVISTA estimates that total remaining expenditures to comply is in the range of $125 - $150 million, to be spent over the next two years.

INVISTA's liquidity is good and consists of balance sheet cash at March 31, 2020, a undrawn revolver due December 2024 with its parent, Koch Industries, a long term note receivable from Koch, and a short term cash management agreement (CMA). We expect the company to keep minimal cash balances of approximately $30 million and use daily sweeps to and from Koch to manage its cash needs. The $500 million unsecured revolving facility from Koch contains material adverse change (MAC) representation requirements at each time of borrowing but given the nature of parent and subsidiary relationship and historic capital support, we expect the requirement to be more lenient than typical bank MAC representation requirements.

INVISTA Nylon Chemicals (China) Co. Ltd., a Chinese subsidiary of INVISTA entered into a 10 year secured, RMB-denominated construction financing agreement in March, 2020 to fund 80% of the China ADN project. The debt is guaranteed by INVISTA (China) Investment Co., Ltd. and secured by assets of the borrower and guarantor only. The debt is non-recourse to INVISTA. On a consolidated basis the heavy capex associated with the project is expected to result in negative free cash flow in 2021, with the shortfall financed with borrowings under the construction loan. The capex spending is expected to peak in 2021 and decline significantly in 2022.

The stable outlook reflects our expectation that INVISTA will continue to generate strong retained cash flow and set the pace of future capex plans so as to not overly stress free cash flow or require significant increases in balance sheet leverage. The stable outlook also anticipates M&A activity or special large projects will be financed prudently so as to not overly stress metrics for an extended period of time.

Moody's has decided to withdraw the exiiting Ba1 CFR ratings for its own business reasons. Please refer to the Moody's Investors Service Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

While it is unlikely that Moody's would consider an upgrade given the M&A risk, the rating could eventually be upgraded if M&A risk dissipates (following a medium or large acquisition) and net leverage is sustained at less than 1.5x and Retained Cash Flow/Debt is sustained above 35%. Moody's could lower the company's rating if following an acquisition leverage is elevated and not expected to recover in a reasonable time period. Moody's could also lower the rating if net leverage were to be sustained over 3.0x, or if retained cash flow/debt declined below 20%.

The principal methodology used in these rating was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

INVISTA Equities, LLC, with significant operations in the United States, is one of the world's leading producers of nylon 6,6 intermediates, polymers and fibers. The company is the global leader in the production of key nylon intermediates, ADN and HMD, and a leader in nylon 6,6 fibers and polymers, which are used in auto under-the-hood applications, electrical, electronic, industrial and consumer end markets The company is an independently managed, wholly-owned, indirect subsidiary of Wichita, Kansas-based Koch Industries, Inc. Revenues were $3.6 billion for the 12 months ending March 31, 2020.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The rating have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Joseph Princiotta
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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