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Rating Action:

Moody's assigns first-time B3 CFR to Isola USA, B1 to term loan; outlook stable

24 Aug 2010

Approximately $225 million of debt rated

New York, August 24, 2010 -- Moody's Investors Service assigned to Isola USA Corp. ("Isola USA") first-time Corporate Family (CFR) and Probability of Default Ratings (PDR) of B3, with a stable rating outlook. Concurrently, Moody's assigned a B1 rating to Isola USA's proposed $225 million senior secured first-lien term loan due 2015. The loan will benefit from full guarantees from Isola USA's ultimate parent, Isola Group, S.a.r.l. ("Isola"), and various second, third and fourth-tier holding company parent subsidiaries, as well as Isola USA's domestic operating subsidiaries.

The following first-time ratings/assessments were assigned:

Corporate Family Rating -- B3

Probability of Default Rating -- B3

$225 million Senior Secured First-Lien Term Loan due 2015 -- B1 (LGD-2, 25%)

The rating outlook is stable.

RATINGS RATIONALE

Isola, a provider of high-performance laminates to the printed circuit board industry (PCB), is owned by private equity sponsor TPG Capital, and management. Ratings were assigned in connection with the recapitalization of Isola's balance sheet. Proceeds from the new $225 million senior secured term loan, a new 5½ year $150 million 16% unrated subordinated unsecured loan (PIKs at a rate of 8%/annum) plus balance sheet cash will be used to repay existing first-lien (including a swap termination fee) and second-lien term loans.

The B3 CFR reflects the company's small scale relative to larger vertically-integrated competitors who are typically divisions of multinational conglomerates with greater resources. The rating also considers Isola's high PCB customer concentration, dependence on the volatile semiconductor industry and exposure to original equipment manufacturers (OEMs) in the highly cyclical technology, telecommunications and networking end markets. The rating incorporates Isola's historical revenue declines, operating losses and negative free cash flow (FCF) during the recession (FY08 and FY09), offset by recent improvement in profitability and cash flow generation. Lastly, the rating recognizes the company's moderately high pro forma financial leverage (5.8x adjusted total debt/LTM EBITDA) and modest liquidity relative to its business risk.

Partly mitigating these concerns, the B3 rating simultaneously acknowledges Isola's leading global market positions across the high performance and high Tg laminates markets. With good diversification across products, end markets and geographies, the rating captures Isola's long-standing relationships and early participation with leading electronics OEMs. In our opinion, this has enabled the company to successfully align its R&D/product roadmap and develop solutions that meet customers' more complex product requirements. The rating also takes into consideration Isola's improving margin profile given the recent cost saving measures, recovery in PCB demand and mix shift to high performance products which carry richer margins.

The stable outlook recognizes our expectation that Isola will maintain steady customer relationships and sustain its leadership positions across high performance laminates. It also reflects our expectation that margins will continue to demonstrate improvement relative to historical levels and Isola will generate positive, though modest, FCF over the next 12 months. Following transaction closing, we anticipate additional liquidity will be derived principally from balance sheet cash of approximately $40 million since Isola will not have a revolving credit facility, which restrains its liquidity profile as well as the rating.

The ratings could experience upward pressure if the company were to demonstrate sustainable improvement in operating performance as a result of its reduced fixed cost structure and ongoing mix shift to higher margin high performance laminate products, which should be evidenced in consistently higher margins. Ratings could also migrate higher to the extent adjusted total debt to EBITDA improved to 4.0x and the company demonstrated sustained positive FCF generation.

Ratings could migrate lower if: revenues were to experience significant downward pressure as a result of market share losses or increased competition; margins eroded as a result of lower volumes, pricing pressures or higher operating costs; leverage, as measured by adjusted total debt to EBITDA, increased to 7.0x or higher; the company's liquidity position were to weaken; or there was a material change in the business profile.

The principal methodologies used in rating Isola USA Corp. were Global EMS & IT Distribution Industries published in December 2008, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website. Moody's subscribers can find additional information in the Isola USA Corp. Credit Opinion published on www.moodys.com.

Headquartered in Chandler, Arizona, Isola USA Corp. is a principal operating subsidiary of Isola Group, S.a.r.l., a leading developer and global supplier of high-performance laminates to printed circuit board fabricators that, in turn, supply the major technology original equipment manufacturers. Isola's products are sold into instruments/controls, medical, telecom/datacom, military/aerospace and computing/networking end markets. Revenues (excluding discontinued operations) for the last twelve months ended June 30, 2010 (LTM) were $544 million.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service's information.

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

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

Moody's assigns first-time B3 CFR to Isola USA, B1 to term loan; outlook stable
No Related Data.
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