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Rating Action:

Moody's lowers ratings of Sterling Chemicals -- CFR B3

Global Credit Research - 27 Oct 2010

Approximately $150 Million of Debt Securities Affected.

New York, October 27, 2010 -- Moody's Investors Service lowered the existing Corporate Family Rating of Sterling Chemicals, Inc. (Sterling) to B3 from B2. Moody's also lowered Sterling's $150 million senior secured notes, due 2015 to B3 from B2, (see list below). The rating outlook is negative. This concludes the review for downgrade which commenced on November 18, 2009. The SGL-3 assessment was affirmed subject to the presence of adequate cash remaining on the balance sheet. Moody's review focused on the impact on the loss of the plasticizers production agreement at the end 2010, the company's reduced liquidity, and possible plans for the reduction in cash balances to fund growth initiatives.

RATINGS RATIONALE

The overriding driver of the B3 rating is the single site plant for Sterling's operations located on the Texas gulf coast. The lower ratings reflect the company's continuing operating losses combined with the termination of the plasticizers production agreement with BASF at the end of 2010. Sterling's revenues have been declining since 2006 as one of the company's three product lines have been closed and the plasticizers segment is currently under review. Sterling is now reliant on the sales of acetic acid to a single customer BP Amoco Chemical Company (BP Chemicals). Sterling is BP Chemicals' sole source of acetic acid production in the Americas. BP Chemicals markets all of the acetic acid that Sterling produces and pays Sterling, among other amounts, a portion of the profits derived from its sales of Sterling's acetic acid. In addition, BP Chemicals reimburses Sterling for 100% of Sterling's fixed and variable costs of production, other than specified indirect costs. For 2008, the BP Chemicals relationship generated $130 million in revenues and $28 million in gross profit. In 2009 performance was negatively impacted by an acetic acid plant turn around. For the first six months of 2010 ending June 30, 2010 revenues and gross profit were $49 million and $7 million, respectively. We believe that this represents BP Chemicals only North American based acetic acid production and due to the low price outlook for natural gas this production will likely maintain a cost advantage relative to other global competitors.

A further rating concern centers on Sterling management's timing, size, and pace of acquisitions. In May 2010 management publicly announced a board backed decision to focus its search for acquisition candidates on companies or assets involved in chemical distribution, specialty chemical manufacture or bulk, petroleum and chemical storage or logistics. Management anticipates that the structure of the financing for any such acquisition will be flexible and determined by, among other things, the characteristics of the acquisition target. The acquisition price may involve a cash purchase, a merger, an exchange of stock or another financing mechanism, or the formation of a joint venture or other business partnership. Management has suggested publicly that the current strength of their balance sheet, with a current cash position of over $120 million, should enable Sterling to close quickly on any attractive and accretive acquisition opportunity. Moody's would view the use of cash for acquisitions as a potential negative for credit quality, absent an increase in stable EBITDA from a proposed venture. The current cash balance, for now, is a key support to Sterling's credit profile given that at the end of June 2010 cash on the balance sheet approximates total debt; $121.5 million of cash versus $123 million of long term debt. The $123 million of long term debt on the balance sheet reflects the company's purchase of $27 million of the notes in late 2009 and early 2010 and these notes remain outstanding. We note that as of June 30, 2010 Sterling was in compliance with the covenants on its public debt.

Ratings Downgraded

..Issuer: Sterling Chemicals, Inc.

....Corporate Family Rating, Lowered to B3 from B2

....Probability of Default Rating, Lowered to B3 from B2

....Senior Secured Notes due 2015, Lowered to B3 from B2 LGD3 38%

Outlook Actions:

..Issuer: Sterling Chemicals, Inc.

....Outlook, Changed To Negative from Rating Under Review

The ratings for the notes due debt instruments reflect both the overall Probability of Default (PDR) for Sterling, to which Moody's has assigned a B3 PDR, and an average mean family loss given default assessment of 50%, in line with Moody's LGD Methodology. The notes are secured by a first lien against all the property plant and equipment (PP&E) of Sterling. However, Moody's notes that there is the potential for modest carve outs of this security package going forward and we will review the security carve outs and their impact on credit support at such time. The net book value of PP&E has declined from $287 million at the end of 2002 to $63 million at the end of June 2010. This decline of $224 million resulted largely from asset impairments to pp&e in 2004 and 2006 totaling $150 million. Moody's views pp&e values, absent potential carve outs, as being in excess of the net book value reported. Sterling's plant site covers an area of 290 acres, is strategically located on Galveston Bay and benefits from a deep-water dock capable of handling ships with up to a 40-foot draft, as well as four barge docks, direct access to Union Pacific and Burlington Northern railways, 135 acres of available land zoned for heavy industrial use, additional land zoned for light industrial use and a supportive political environment for growth. In addition the site is in the heart of one of the largest petrochemical complexes on the Gulf Coast and as a result has on-site access to a number of key raw material pipelines as well as close proximity to a number of the larger refinery complexes that provide some of Sterling's principal raw materials.

The notes, which comprise the bulk of the company's debt capital structure, are rated B3 (LGD3-38%), the same rating as the B3 CFR. This rating is one notch lower than the LGD methodology-implied rating suggested by the modeling template. The rating committee override more appropriately reflects the perceived importance/size of these note obligations relative to the overall waterfall of debt and other non-debt claims.

The outlook is negative reflecting the loss of business and the possible reduction of cash balances from growth initiatives. Upside to the rating is limited at the present due to uncertainty surrounding the company's acquisition plans and future operational goals. An upward revision to the rating could be considered as the company develops a successful operational and sustainable track record over 4-8 quarters and demonstrates improved credit metrics, especially if free cash flow to debt were to sustainably approach 4%. The ratings could come under pressure in the event of a faster than anticipated deterioration in the remaining acetic acid business or if free cash flow were to remain negative through 2011.

The principal methodologies used in rating Sterling Chemicals were Global Chemical Industry published in December 2009, 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.

Headquartered in Houston Texas, Sterling is a producer of selected petrochemicals used to manufacture a wide array of consumer goods and industrial products throughout the world. The company's primary products are currently acetic acid and plasticizers. Revenues for the LTM period ended June 30, 2010 were $118 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, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

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
William Reed
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's Investors Service
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New York, NY 10007
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Moody's lowers ratings of Sterling Chemicals -- CFR B3
No Related Data.
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