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Global Credit Research - 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%
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.
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
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.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's raises Solutia's CFR to Ba3; outlook stable
250 Greenwich Street
New York, NY 10007
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