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Rating Action:

Moody's confirms Hexion's ratings with a negative outlook

19 Dec 2008
Moody's confirms Hexion's ratings with a negative outlook

Approximately $ 3.8 Billion of Debt Securities Affected.

New York, December 19, 2008 -- Moody's Investors Service confirmed the ratings (Corporate Family Rating -- CFR - at B2) on Hexion Specialty Chemicals, Inc. (HSCI) subsequent to the company's announced settlement agreement with Huntsman Corporation regarding litigation related to the failed acquisition of Huntsman by Hexion. Under the settlement agreement, HSCI would be liable for a $325 million payment and jointly and severally liable, along with certain affiliates of Apollo, for an additional $225 million. As part of the agreement, Apollo will contribute $200 million to Hexion LLC, which can be used for general corporate purposes. Hexion LLC is the parent company of HSCI. This concludes the review that was initiated on July 5, 2007 after the announcement of HSCI's bid to acquire Huntsman. The outlook on HSCI is negative.

As specified under the original commitment letter for the transaction, Deutasche Bank and Credit Suisse will loan Hexion LLC $325 million in the form of a 6.25% six year term loan, with a 0.75% toggle option. Hexion LLC will contribute these funds to HSCI to make the $325 million payment to Huntsman. Moreover, HSCI's management believes that the $200 million investment by Apollo will remain available to HSCI after all compensation payments are made to Huntsman.

HSCI's B2 CFR reflects the modest increase in leverage due to the settlement agreement, weak credit metrics, exposure to cyclical end markets and the potential for additional bolt-on acquisitions. These credit negatives are partially offset by company's size, product diversity, global operations, a seasoned management team, on-going cost reduction efforts, weak covenants in its bank facility and the expectation of a meaningful reduction in its net working capital in the fourth quarter due to the decline in commodity prices. Hexion's financial performance will be negatively impacted in 2009 due to the downturn in the US and European economies and weak demand growth in Asia. Additionally, Moody's is concerned about a sustained downturn in the electronics market that could increase margin pressure in epoxies.

The negative outlook reflects the difficult operating environment and the likelihood that the company's financial metrics will come under increasing pressure over the next 12-18 months. If the headroom under the financial covenant falls below $50 million of EBITDA or if the ratio EBITDA-Capex/Interest falls meaningfully below 1.0x, Moody's could lower the company's ratings. Conversely, if Net Debt/EBITDA falls below 6.0x and Retained Cash Flow/Net Debt rises sustainably above 5.0%, Moody's could stabilize HSCI's outlook. These metrics incorporate Moody's standard adjustments to financial statements.

"The quick resolution of this litigation reduces some of the downward pressure on Hexion's ratings, as management's time must be focused on accelerating cost reductions given the weakening economic environment" stated John Rogers, Senior Vice President at Moody's, "however, the ratings still could be lowered if the cash inflows from lower commodity prices and on-going cost reductions are not sufficient to prevent a further erosion of credit metrics."

Confirmations:

..Issuer: Hexion Specialty Chemicals Inc.

....Corporate Family Rating, Confirmed at B2

....Probability of Default Rating, Confirmed at B2

....Senior Secured 1st Lien Bank Credit Facility, Confirmed at Ba3, LGD2 (point estimate changed to 23% from 24%)

....Senior Secured 2nd Lien Notes, Confirmed at B3, LGD5, (point estimate changed to 72% from 75%)

....Speculative Grade Liquidity Rating, Affirmed at SGL-2

..Issuer: Borden Chemical, Inc.

....Senior Unsecured Regular Bond/Debenture, Confirmed at Caa1 (point estimate changed to 90% from 94%)

..Issuer: Ascension (Parish of) LA

....Senior Unsecured Revenue Bonds, Confirmed at B3 (point estimate changed to 72% from 75%)

Moody's last rating action for HSCI was on July 5, 2007 when Moody's place their ratings (B2 CFR etal.) under review for possible downgrade after the announcement of HSCI's bid to acquire Huntsman.

The principal methodology used in rating Hexion is Moody's Global Chemical Industry rating methodology, which can be found at the www.moodys.com website in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory (February, 2006, document #96180). Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Credit Policy & Methodologies directory.

Hexion Specialty Chemicals, Inc., headquartered in Columbus, Ohio is a leading producer of commodities such as formaldehyde, bisphenol A and epichlorhydrin, as well as formaldehyde-based thermoset resins, epoxy resins, and versatic acid and its derivatives. The company is also a supplier of specialty resins for inks and specialty coatings sold to a very diverse customer base. The company reported sales of $6.4 billion for the LTM ending September 30, 2008.

New York
John Rogers
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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