First rating assignment since W. R. Grace's April 2001 US Chapter 11 bankruptcy filing
New York, January 09, 2014 -- Moody's Investors Service has today assigned a corporate family rating
(CFR) of Ba2 and a probability of default rating (PDR) of Ba2-PD
to W. R. Grace & Co.--Conn. (Grace).
Concurrently, Moody has assigned a Ba2 rating to Grace's proposed
$1.55 billion first-lien senior secured credit agreement.
The first-lien senior secured credit agreement consists of (1)
an equivalent $400 million revolving credit facility due 2019;
(2) an equivalent $900 million term loan facility due 2021;
and (3) a $250 million delayed-draw term loan due 2021.
Moody's has also assigned an SGL-2 speculative grade liquidity
rating. The outlook on the ratings is stable. These ratings
assume that the terms of the final executed agreements will be substantially
similar to the draft documentation provided.
This is the first time that Moody's has assigned ratings to Grace since
it filed for reorganization under Chapter 11 of the United States Bankruptcy
Code on 2 April 2001. Grace recently announced that it expects
to get approval for the final pre-bankruptcy claim settlement at
a bankruptcy court hearing scheduled for 29 January 2014. Grace
has also announced a pending placement of $1.55 billion
in senior secured debt (the transaction) to fund an approved, post-bankruptcy,
Moody's understands that the proceeds from the proposed transaction will
primarily be used to (1) fund Grace's initial contributions to two
ongoing asbestos-related claims trusts; (2) pay pre-bankruptcy
unsecured debt claims, with accrued interest; and (3) pay related
transaction fees and expenses.
Moody's expects Grace to emerge from bankruptcy on or around 31
January 2014, assuming approval from the bankruptcy court on the
final settlement and the successful execution of the debt placement transaction.
"The assigned Ba2 CFR reflects Grace's moderate financial leverage
and our expectation that after emerging from bankruptcy the company will
face several potential threats to its credit profile, including
ongoing asbestos-related payments, legacy reputational concerns,
and newly energized shareholders," says Anthony Hill, a Moody's
Vice President - Senior Analyst and lead analyst for Grace.
..Issuer: W.R. Grace & Co.-Conn.
.... Corporate Family Rating, Assigned
.... Probability of Default Rating,
.... Speculative Grade Liquidity Rating,
....Senior Secured Bank Credit Facilities,
Assigned Ba2 LGD3, 40 %
The Ba2 CFR assigned to Grace reflects the company's moderate financial
leverage, which Moody's expects will be around 3.5x debt/EBITDA
(on a Moody's-adjusted basis) for the financial year-end
December 2013 and pro forma for the transaction. While Moody's
expects the company to reduce leverage over the coming quarters,
Grace is significantly exposed to a challenged US construction market
and a weak European chemicals trading environment that is expected to
exist through at least 2014.
The rating also reflects Moody's cautious view of the company's lack of
operating history outside of bankruptcy court protection. The Grace
corporate bankruptcy has been one the longest in US history. For
over 12 years, Grace has received court protection from the demands
of claimants, creditors, and shareholders. While in
bankruptcy, Grace's acquisition ambitions were modestly constrained.
Moody's believes that when Grace emerges from bankruptcy, the company
will face extraordinary distractions that may dilute management's attention.
These concerns will include cash management for the funding of ongoing
asbestos- and environmental-related obligations through
at least 2033; enhanced corporate governance to offset legacy reputational
issues; an expanding business model that calls for ongoing acquisitions;
and newly energized shareholder demands. Each of these areas represents
a potential threat to Grace's post-bankruptcy credit profile.
Grace has three segments, the largest of which is the catalyst business,
which generate over two-thirds of its total EBITDA. Grace
is a leading global provider of refinery catalysts. Moody's
expects continued global growth in demand for refined oil products,
such as transportation fuels, over the coming years, especially
in the emerging markets. As a result, Moody's also
expects demand for refining catalysts to remain solid over the coming
years, making it necessary for Grace to ensure sufficient investments
in its current plants and its global expansion projects in order to maintain
its competitive position and an adequate level of supply for its customers.
Moody's believe that the new threats to the company's credit
profile are partially offset by its moderate leverage and elevated free
cash flow. The rating agency is concerned that upon emergence management
may make shareholder remuneration a higher priority or that other exogenous
events may delay deleveraging. Additionally, Grace's
global competition in the refinery catalyst business are larger and have
more financial flexibility; companies such as Royal Dutch Shell Plc
(Aa1 stable), BASF (SE) (A1 stable), LyondellBasell Industries
N.V. (Baa1 stable), and Albemarle Corporation (Baa1
Furthermore, Moody's believes that the move to lighter refinery
feedstocks in US combined with the economic slowdown in Europe (primarily
affecting the construction segment) will pressure top-line revenue
generation and profitability at Grace.
Yet for all of these concerns, the Ba2 CFR also reflects Grace's
strength as a leading specialty chemicals producer for the global refining
catalyst, packaging, and construction industries, with
a track record of maintaining solid market share positions across a diverse
product line. The rating also acknowledges Grace's proven
ability to generate solid cash flows through all global economic cycles,
and its resilient business model, solid operating performance,
and ability to pass through material and production costs while simultaneously
improving marginal income. Ultimately, the rating agency
expects Grace's operating performance to be solid over the coming
Moody's believes that Grace's liquidity, pro forma the transaction,
will comfortably cover its near-term requirements. Pro forma
for the transaction and by financial year-end December 2014,
Moody's expects the company to exhibit an adjusted cash balance of approximately
$475 million. Internally generated cash flow and the undrawn
$400 million revolving credit facility will cover the company's
ongoing basic cash needs, such as debt service and amortisation,
working capital needs, expected capital expenditures (including
expansionary capital investments), and any legacy liability payments.
Using Moody's Loss Given Default (LGD) methodology, the PDR is equal
to the CFR, based on a 50% recovery rate, primarily
due to the covenant-lite structure of the senior secured credit
facilities. Moody's also used this methodology to assign
a Ba2 rating to the revolving credit facility and other first-lien
senior secured credit facilities. In Moody's opinion,
the level of US-based collateral backing Grace's US-issued
debt is not adequate to warrant any upward notching of the ratings of
the first-lien senior secured credit facilities. As a result,
these ratings are also equal to the CFR.
The stable outlook reflects Moody's expectation that Grace's
post-bankruptcy credit metrics will improve over the coming quarters,
in line with the rating agency's expectation of continued solid
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's would consider upgrading Grace's rating if the company
(1) has no new or significant claims related to legacy liabilities made
against it; (2) maintains conservative financial policies with respect
to acquisitions and shareholder distributions; and (3) continues
to meet, or exceed, Moody's operational performance
expectations post bankruptcy and over the coming quarters. Quantitatively,
Moody's would consider upgrading Grace's ratings if the company's
Moody's-adjusted (1) debt/EBITDA ratio is around 3.0x;
(2) EBITDA/interest expense ratio is above 6.0x; and (3) retained
cash flow/debt ratio is above 20% -- all on a sustained
Conversely, while Moody's does not expect downward pressure
on the rating, the rating agency could assess the potential for
a downgrade if Grace's financial policies, with respect to
acquisitions and shareholder distributions, become aggressive;
or the company's operating performance exhibits any sign of sustained
weakness. Quantitatively, Moody's would consider downgrading
Grace's ratings if the company's Moody's-adjusted
(1) debt/EBITDA ratio increases to around 4.0x; (2) EBITDA/interest
expense ratio falls below 4.0x; or (3) retained cash flow/debt
ratio falls to around 15%.
The principal methodology used in rating W. R. Grace &
Co.--Conn. was the Global Chemicals Industry Methodology,
published in December 2013. Other methodologies used include Loss
Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA, published in June
2009. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
Headquartered in Maryland, USA, W. R. Grace
& Co. is the ultimate parent of W. R. Grace &
Co.--Conn. Grace is a manufacturer of specialty chemicals
and materials with operations in over 40 countries. Grace has three
major reporting segments: (1) catalysts technologies (40%
of 2012 revenue); (2) materials technologies (27%); and
(3) construction products (33%). Approximately 72%
of the company's sales are generated outside of the US. Moody's
projects Grace's financial year-end December 2013 revenues and
Moody's-adjusted EBITDA, pro forma for the transaction,
will be approximately $3.0 billion and $716 million,
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
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for additional regulatory disclosures for each credit rating.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
MD - Corporate Finance
Corporate Finance Group
Moody's assigns Ba2 CFR to W. R. Grace; outlook stable
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007