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Global Credit Research - 11 Aug 2010
Approximately $750 million of proposed debt securities rated
New York, August 11, 2010 -- Moody's Investors Service assigned a provisional (P)Ba1 rating to a proposed
$300 million, six-year, senior secured term
loan credit facility for Chemtura Corporation (Chemtura). Moody's
also assigned a provisional (P)B1 rating to proposed $450 million
senior unsecured notes due 2018, a provisional (P)Ba3 Corporate
Family Rating (CFR) and Probability of Default Rating, and a SGL-3
Speculative Grade Liquidity Rating. The outlook for the ratings
Moody's understands that the proposed debt offerings will primarily be
used to repay the DIP loans of $300 million, financing fees,
and distributions under Chemtura's plan of reorganization when the
company exits from bankruptcy. The provisional ratings are assigned
pending the emergence from bankruptcy and the closing of the proposed
exit financing. The company is expected to emerge from bankruptcy
in early October 2010.
The ratings assigned are subject to a complete review by Moody's of the
final credit facility, term loan and senior note documents and are
also subject to the transactions being closed in a manner and with terms
that are substantially identical to those that have been shared with Moody's.
Issuer: Chemtura Corporation
Corporate Family Rating, Assigned (P)Ba3
Probability of Default Rating, Assigned (P)Ba3
Speculative Grade Liquidity Rating, Assigned SGL-3
Senior Secured Bank Term Loan, Assigned (P)Ba1 (LGD2, 17%)
Senior Unsecured Note, Assigned (P)B1 (LGD4, 68%)
The (P)Ba3 CFR reflects the company's initial moderately high leverage
and weak credit metrics along with the possible uncertainty surrounding
the company's future performance upon exiting bankruptcy.
An additional concern centers on the high amount of restructuring the
firm and its employees have been subject to and the prospect of modest
additional restructuring efforts. A final concern centers on the
still developing board of directors and a desire to better understand
the financial philosophy of the board with a specific focus on the makeup
of the shareholder base and what their goals are for their investment
Following the refinancing and exit from bankruptcy, Chemtura will
have moderately high leverage, particularly after adjusting debt
for operating leases and pensions, which add some $197 million
and $441 million, respectively. At the end of calendar
year 2008 Chemtura's balance sheet debt totaled roughly $1.2
billion versus the expected balance sheet debt of about $750 million
upon emergence. Chemtura's leverage is still markedly lower
than many companies that have exited bankruptcy in the past. Moody's
projected coverage for fiscal year 2010 (based on our debt adjustments),
as measured by EBITDAR/Interest, is about 3.0 times while
projected leverage as measured by Debt/EBITDAR is approximately 4.2
times. In Moody's forecast, adjusted debt is projected at
slightly above $1.4 billion at year end 2010 post-emergence.
Pro forma debt to book capital would be just above 50%.
As mentioned above, these ratios are generally more favorable than
the weaker historic metrics of other companies coming out of bankruptcy.
Moody's notes that with fresh start accounting, tangible net worth
is likely to be a positive number in excess of $350 million which
is also unique for companies exiting bankruptcy.
Chemtura's business profile and annual revenues in excess of $2.5
billion in 2010 are consistent with the Baa rating category. Chemtura's
strong business profile reflects its operational, geographic and
product diversity in the numerous businesses that it operates in.
With operating plant sites in North and South America, Europe,
Africa and the Middle East, and Asia-Pacific, Chemtura
has both operational (31 sites in 13 countries) and geographic diversity
befitting a strong business profile. Revenues are split between
its four main business segments - with Industrial Performance Products
segment representing the largest business with some 45% of revenues
for the 12 months ending June 30, 2010. Chemtura also scores
relatively high in terms of market positions within the end markets of
its main products.
Additional positive factors supporting the ratings include the reduction
in pre-bankruptcy liability exposure and the relative stability
of EBITDAR margins over the last four years (excluding reorganization
costs) with margins never dropping below 11%. Management's
track record and actions to effectively cut costs and to improve Chemtura's
business profile during the bankruptcy period are positive factors supporting
the ratings. These efforts resulted in the reduction in work force
by some 32% since the end of 2006 and the reduction (via closure
or sale) of six facilities.
The stable outlook reflects Moody's expectation that management will continue
to focus on improving global cost positions and generating free cash flow.
Additionally, it assumes that management's financial policies will
be relatively conservative. The board has yet to be determined
and the ultimate shareholders of the company and their relative voting
power is also unclear. Thus a limiting factor for further upward
rating movement is the need to understand what changes, if any,
the new board will institute in management's aspirations to de-lever,
reduce pension underfunding, and achieve higher credit ratings.
If Moody's were to become comfortable with management's financial
goals and Chemtura were to maintain total debt/EBITDA of less than 3.2x
and RCF/total debt of 20%, Moody's would consider a positive
outlook or the appropriateness of a higher rating. If, however,
total debt/EBITDA were to rise above 5.0x, Moody's could
change the outlook to negative.
The Speculative Grade Liquidity Rating of SGL-3 reflects the company's
adequate liquidity and Moody's expectation of reasonable free cash flow
generation, in excess of $60 million, during 2011.
The rating is supported by Chemtura's favorable debt maturity profile
and expected flexibility under the financial covenants for the company's
asset backed credit facility. A factor supporting a higher SGL
rating is the cash balance in excess of $100 million, in
combination with a revolver that is not expected to be accessed over the
long term provides good liquidity. However, seasonal working
capital growth needs in the first half of 2011 will likely be financed
by the revolver, which could be repaid by the end of 2011 with the
corresponding working capital inflows. Until a permanent board
with an enumerated financial philosophy is made public it is difficult
to provide full credit for the excess cash on the balance sheet.
The SGL-3 also reflects the fact that final drafts of the credit
agreements along with the financial covenants were not yet available.
The unrated asset-based credit facilities are secured by a first
lien on inventory and receivables and a second lien on assets securing
the term loan. The term loan has second priority liens on the inventory
and receivables and first priority liens on property, plant and
equipment that suggests adequate collateral coverage. In our opinion,
the collateral package for the term loan may at the current time adequately
cover the term loan in a default scenario. The (P)B1 rating on
the unsecured notes reflects its subordination to a substantial amount
of first lien debt and potential debt at international subsidiaries.
The rating on the unsecured notes also recognizes the high proportion
of notes in Chemtura's capital structure and reflects their junior
position in the capital structure and the prospect of limited protection
after the first and second lien lenders have been provided for in a distressed
This is the first time that Moody's has rated the debt of Chemtura on
a monitored basis since withdrawing its Ca CFR in March of 2009 after
the company filed voluntary petitions for reorganization under Chapter
11 of the U.S. Bankruptcy Code.
The principal methodology used in rating Chemtura was Moody's Global Chemical
Industry rating methodology, published in December 2009 and available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
Chemtura Corporation manufactures and sells innovative, application-focused
specialty chemical and consumer products offerings. The company's
principal executive offices are located in Philadelphia, Pennsylvania
and Middlebury, Connecticut with a large portion of the headquarters
function residing in Middlebury. Chemtura operates in a wide variety
of end-use industries, including automotive, transportation,
construction, packaging, agriculture, lubricants,
plastics for durable and non-durable goods, electronics,
and pool and spa chemicals. Pro-forma net sales for the
twelve months ending June 30, 2010 are estimated to be $2.6
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns (P)Ba1 to Chemtura's term loan; (P)Ba3 CFR
250 Greenwich Street
New York, NY 10007
No Related Data.
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