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Rating Action:

Moody's raises Solutia's CFR to Ba3; outlook stable

08 Nov 2010

Over $1.8 billion of rated debt affected

New York, November 08, 2010 -- Moody's Investors Service raised the Corporate Family Rating (CFR) of Solutia Inc. (Solutia) to Ba3 from B1. Moody's also raised the ratings of Solutia's existing senior secured credit facilities to Ba1 from Ba2, and raised the ratings of its outstanding senior unsecured notes to B1 from B2 (see list below). In addition Moody's affirmed the company's Speculative Grade Liquidity (SGL) rating of SGL-2. The outlook is stable.

Ratings Raised --

Corporate Family Rating to Ba3 from B1

Probability of Default Rating to Ba3 from B1

Senior Secured Credit Facility due 2015 to Ba1, LGD2, 20% from Ba2, LGD2, 22%

Senior Secured Term Loan B due 2017 to Ba1, LGD2, 20% from Ba2, LGD2, 22%

8.75% senior unsecured notes due 2017 to B1, LGD5, 75% from B2, LGD5, 73%

7.875% senior unsecured notes due 2020 to B1, LGD5, 75% from B2, LGD5, 76%

RATING RATIONALE

The upgrade to a Ba3 CFR reflects the prospect of a continuing, sustainable, and significant improvement in operating income and credit metrics generated by Solutia's businesses over the next several years. This view of improved performance is supported by the improved performance in the past four quarters ending September 30, 2010. During this time there has been a significant increase in adjusted EBITDA with management projecting $500 million for the full year ending December 31, 2010, (not including the full year impact of recent acquisitions). For the first 9 months of 2010 EBITDA was up 38%, year over year, to $388 million. There has also been meaningful improvement in Funds From Operations rising to $211 million - an increase of 12% over fiscal year 2009 (FFO; defined as Cash Flow From Operations less the change in working capital) over the LTM time period ending September 30, 2010. Solutia's improved performance is being aided by volume improvements across all business lines and geographies.

"Solutia has improved on a sustainable basis in regards to the profitability of its wholly owned operations," stated Bill Reed, Vice President at Moody's. "In addition, the cash generated in 2011 will continue to improve its financial flexibility in managing significant debt maturities in 2017 and beyond."

The move to a Ba3 CFR reflects both the recent relatively stable operating performance, including margin improvement, in a difficult global economic environment, indicating the prospect for further healthy cash flow generation, notwithstanding incremental increases in debt to fund growth. The rating also incorporates our anticipation that major material debt financed acquisitions are unlikely, and that Solutia's remaining business lines will generate, over time, cash flow that is positive and improving relative to existing debt levels.

After emerging from bankruptcy in early 2008, Solutia remains highly leveraged with balance sheet debt of $1.5 billion at the end of September 2010. Leverage remains high, particularly after adjusting debt for rent and pensions, which adds roughly $114 million and $366 million, respectively. Interest coverage for the LTM period ending September 30, 2010 (based on our adjusted debt), as measured by EBITDA/Interest, is about 2.1 times while leverage as measured by Debt/EBITDA is 4.6 times. In our projections, adjusted debt for 2011 is estimated at about $1.9 billion and pro forma adjusted debt to book capital would be just above 65% at December 31, 2011. We note that even with fresh start accounting, tangible net worth is a negative $1 billion at the end of September 30, 2010.

While we recognize that good progress has been made in the elimination, classification and/or sharing of environmental, legal and pension liabilities, there remains some uncertainty as to the ultimate scope of these liabilities, particularly the environmental liabilities. We believe that these environmental liabilities are subject to changing governmental policy and regulations, discovery of unknown conditions, judicial proceedings, method and extent of remediation, existence of other potentially responsible parties and future changes in both measurement and remediation technologies.

Additional positive factors supporting the ratings include: • strong geographic, product and operational diversity • sizeable market leadership in the markets Solutia serves • sizeable revenue base - projected to exceed $1.9 billion in 2010 • the ability to share on a 50/50 basis with Monsanto environmental liabilities at certain sites if the costs exceed $325 million. We also believe that the acquisition of Vistasolar for Euro 240 million in cash, notwithstanding the high multiple paid, is a logical and strong strategic fit for the company.

While, the stable outlook reflects the high leverage at the end of 2010, we expect at the end of 2011 and 2012 leverage will likely move close to 3.8 times. In addition, our concerns over Solutia's prior business profile were addressed with the sale in 2009 of the integrated nylon business. With the sale of this business Solutia's remaining businesses are both higher margin and less exposed to volatile raw material prices. We also note that a noteworthy percentage of EBITDA is derived from a single reasonably stable product line, Crystex®, that also has a high degree of customer concentration with the bulk of EBITDA being derived from tire manufacturers. Solutia's stable outlook also considers the strength of its franchise in terms of its market positions and long-lived customer relationships. If operating performance is weaker than anticipated such that debt to EBITDA exceeds 4.3 times or material increases in environmental liabilities were to occur, the outlook or rating could turn negative. Over time, if Solutia's credit metrics improve faster than expected, such that debt/EBITDA metrics improve to less than 3.2 times on a permanent basis or if environmental liabilities were deemed to be much improved a positive change in the outlook or rating could occur.

The Ba1 senior secured rating recognizes that the credit facilities will be secured by a first-priority lien on all material property and assets (tangible and intangible) of the borrower and the guarantors. The B1 rating on the unsecured notes reflects their junior position in the capital structure and the prospect of limited protection after the first lien lenders have been provided for in a distressed scenario.

The Speculative Grade Liquidity (SGL) SGL-2 rating reflects the company's good liquidity and our expectation of reasonable retained cash flow, in excess of $244 million, for the fiscal year ending 2010. The rating is supported by Solutia's favorable debt maturity profile, ample availability under its revolving credit facility, and flexibility under the financial covenants for the company's credit facility.

The principal methodologies used in this rating 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.

Solutia, headquartered in St. Louis, Missouri, produces and sells a diverse portfolio of performance materials and specialty chemicals. End markets for Solutia's products include automotive, architectural (residential and commercial), aerospace, process manufacturing, construction, electronic/electrical, and industrial. Net sales for the LTM period ending September 30, 2010 were $2.0 billion.

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 information, and 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
Christina Padgett
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
U.S.A.

Moody's raises Solutia's CFR to Ba3; outlook stable
No Related Data.
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