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Rating Action:

Moody's downgrades KCC's issuer rating to Baa3; outlook negative

 The document has been translated in other languages

15 May 2019

Hong Kong, May 15, 2019 -- Moody's Investors Service has downgraded KCC Corporation's issuer rating to Baa3 from Baa2.

The outlook is negative.

This rating action concludes the review for downgrade, which Moody's initiated on 14 September 2018, following KCC's announced acquisition of Momentive Performance Materials Inc. (B2 stable), a US-based silicone producer.

RATINGS RATIONALE

"The rating downgrade reflects KCC's elevated financial leverage and increased exposure to the cyclical and competitive silicone industry, following its debt-funded acquisition of Momentive," says Sean Hwang, a Moody's Analyst.

On 14 May 2019, KCC announced that it would acquire a 45.5% stake in MOM Holding Company for KRW636 billion. The KCC-led consortium, formed with SJL Partners and Wonik QnC Corporation, will invest a total $1.3 billion in equity and raise $1.7 billion in debt at Momentive to finance the acquisition of 100% of Momentive and refinance Momentive's existing debt. KCC has provided payment guarantee on half of this new debt at Momentive.

After a planned spin-off of Momentive's quartz business, KCC will hold 50% plus one share of Momentive's remaining business and will fully consolidate it in financial reporting.

Given the incremental debt funding and an expected weakening in KCC's earnings, Moody's estimates that the consolidated entity will have pro forma adjusted debt/EBITDA of around 5.0x in 2019 — excluding the quartz business — compared with the 3.4x that KCC recorded in 2018. While Moody's expects KCC to generate free cash flow and gradually reduce its leverage toward 4.5x over the next 12-18 months, this level of leverage will remain weak for the Baa3 rating category.

Nonetheless, Moody's expects KCC to accelerate its debt reduction by monetizing part of its non-core assets. Material debt reductions through non-core asset sales could return KCC's financial metrics to a level more commensurate with the Baa3 rating level, although uncertainty remains as to the timing and scale of such sales.

The acquisition will significantly transform KCC's business mix, with the silicone business accounting for around half of its consolidated EBITDA. This development will improve KCC's business diversity but, as mentioned, will expose the company to the strong competition and cyclicality of the global silicone industry.

Nevertheless, Moody's expects that the tight global supply conditions for silicone will continue to support the earnings of silicone companies over the next 12-18 months, despite a slowing global economy and capacity additions announced by major players that can potentially rebalance the market in 2020 and beyond. In addition, potential synergies from the acquisition and Momentive's growing specialty silicone portfolio somewhat mitigate the business risk.

KCC's rating continues to factor in the solid domestic market position of KCC's existing construction materials and paint business segments, counterbalanced by these segments' weakening operating performance amid Korea's softening housing construction sector as well as event risk stemming from a track record of sizeable non-core investments.

The negative outlook mainly reflects the uncertainty associated with the execution of its deleveraging measures, as well as Moody's expectation that, absent such measures, KCC's financials metrics will remain weak for the Baa3 rating category over the next 12-18 months.

Moody's could revise the outlook to stable if KCC improves its financial profile by maintaining healthy earnings and implementing material deleveraging measures, such that adjusted debt/EBITDA falls below 4.0x-4.3x.

Moody's could downgrade the rating if KCC fails to reduce its financial leverage — because of weak earnings of KCC, Momentive, or both, aggressive investments, or high shareholder returns — such that adjusted debt/EBITDA persistently remains above 4.0x-4.3x.

The principal methodology used in this rating was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

KCC Corporation is Korea's leading manufacturer of industrial paints, building materials, glass and PVC products by revenue. Momentive Performance Materials Inc., now a subsidiary of KCC, is one of the largest global producers of silicone products and silicone derivatives.

REGULATORY DISCLOSURES

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

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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

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.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Sean Hwang
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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