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Rating Action:

Moody's rates Hexion's proposed 1.5 lien notes

13 Jan 2010

Approximately $700 million of rated debt affected

New York, January 13, 2010 -- Moody's Investors Service assigned a B3 rating on Hexion Specialty Chemicals, Inc. (Hexion) proposed $700 million Senior Secured 1.5 Lien Notes due 2018. This rating is subject to approval by the First Lien lenders and receipt of final documentation. Moody's also affirmed Hexion's corporate family rating (CFR) of B3. The ratings outlook on the company is negative, however, if Hexion is able to complete the partial refinancing and loan extension as currently proposed then Moody's could move the outlook to stable as there would be no likely event of default over the next two years. The Speculative Liquidity Rating (SGL) remains at SGL-3.

Moody's views the debt issuance and amendments as a moderate credit positive since they extend the debt maturity profile, reduce the refinancing risk on the term loan, and provide Hexion more financial flexibility. However, the improvements are not sufficient to warrant a rating upgrade as the company remains highly levered and operating environment remains uncertain, despite modest improvements in demand. This issuance, while increasing liquidity by $180 million, offsets roughly half of the total debt reduction in 2009; $285 million of the 2009 debt reduction was accomplished through the purchase of its own debt at distressed prices. Pro forma for the transaction Net Debt-to-EBITDA is 8.8x and Retained Cash Flow-to-Net Debt is 2.3% (these metrics are adjusted using Moody's Global Standard Adjustments to Financial Statements and are not consistent with Hexion's reported numbers).

The $700 million 1.5 lien notes will rank junior in collateral to the senior secured term loan and senior in collateral to the second lien notes and all other unsecured debt. Proceeds from the new notes will be used to refinance $500 million of the term loan debt and fund a $180 million increase in cash. The issuance of the 1.5 lien notes is contingent on the approval by the First Lien lenders for a two year extension on $500 million of the remaining term loan. The transaction also includes amendments to the credit facility to allow for the aforementioned term extension as well as future pari passu and junior financing that would be used to refinance the term loan. Hexion has also recently extended $200 million of their $225 million Senior Secured Revolving Credit Facility by 18 months.

The negative outlook will remain in place until Hexion receives approval for this transaction from its lenders, thereafter we would consider moving the outlook to stable. The positives that would be considered in reviewing the outlook would be the addition of approximately $180 million to the cash balance, the improvement of the maturity profile which moderately reduces the refinancing risk, some positive developments in global economic demand, a strong management team and the reduced likelihood of default over the next two years. The credit negatives that remain include the large total debt levels of the company and uncertainties over the strength of demand improvement, especially in the housing and construction markets through 2011.

In addition, Moody's affirmed Hexion's Speculative Grade Liquidity Rating at SGL-3. Financial covenant headroom will improve substantially as a result of the reduction in term loan debt. Once the company can demonstrate consistent free cash flow generation we would raise the rating to SGL2.

Ratings assigned

Hexion Specialty Chemicals Inc.

Gtd 1.5 Lien Sr Sec Notes due 2/1/2018 B3 (LGD4, 57%)

Gtd. Sr. Sec. Revolving Credit Facility due 02/03/2013 at B1 (LGD2, 24%)

Ratings affirmed and LGD assessments updated:

Hexion Specialty Chemicals Inc.

Corporate Family Rating at B3

Probability of Default Rating (PDR) at B3

Gtd. Sr. Sec. Letter of Credit Facility due 05/31/2011 at B1 (LGD2, 24%)

Gtd. Sr. Sec. Revolving Credit Facility due 05/31/2011 at B1 (LGD2, 24%)

Gtd. Sr. Sec. Term Loan due 05/05/2013 at B1 (LGD2, 24%)

9.75% Gtd 2nd Priority Sr Sec Notes due 11/15/2014 at Caa1 (LGD5, 74%)

Gtd 2nd Priority Sr Sec Flt Rt Notes due 11/15/2014 at Caa1 (LGD5, 74%)

7.875% Bkd Senior Unsecured Notes due 02/15/2023 at Caa2 (LGD6, 91%)

8.375% Bkd Senior Unsecured S.F. Debenture due 04/15/2016 at Caa2 (LGD6, 91%)

9.2% Bkd Senior Unsecured Debentures due 03/15/2021 at Caa2 (LGD6, 91%)

Moody's notes that the point estimates for the LGD assessments were changed to reflect the revised capital structure, and that upon successful completion of the transaction Moody's would assign a B1 (LGD2, 24%) to the extended $500 million Guaranteed Senior Secured Term Loan due 05/05/2015.

Moody's last rating action for Hexion was on June 12, 2009 when Moody's lowered Hexion's PDR due to a distressed exchange; the PDR was restored to prior levels after three business days.

The principal methodology used in rating Hexion was Moody's Global Chemical Industry rating methodology, published in December 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

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 $4.1 billion for the LTM ending September 30, 2009.

New York
Steven Wood
Managing Director
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 rates Hexion's proposed 1.5 lien notes
No Related Data.
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