S&P rates Hexion Holdings, loans B, B-

S&P said it gave B ratings to Hexion Holdings Corp., the parent of Hexion Inc., and its planned $1.4 billion first-lien senior secured term loan. The agency also assigned a B- rating to the company’s planned $425 million second-lien senior secured term loan. The recovery rating on the first-lien loan is 3, indicating meaningful (50-70%; rounded estimate: 60%) recovery in default and the recovery rating on the second-lien loan is 5, indicating modest (10-30%; rounded estimate: 20%) recovery in default.

“Our assessment of Hexion's business incorporates its exposure to several diversified but somewhat cyclical end markets. These include home construction, industrial, furniture, energy, and auto. The company is also exposed to volatile raw material costs for key inputs, such as methanol and urea. Despite a significant portion of the company's sales made under contracts that allow it to recover raw material costs, Hexion has average profitability among specialty chemical producers, with expected adjusted EBITDA margins for the next two years in the low- to mid-teen percentage area,” S&P said in a press release.

American Securities LLC is acquiring the companies in a deal valued at $3.9 billion, including the assumption of debt. Once the acquisition closes and Hexion Inc.’s debt is repaid, S&P said it would withdraw Hexion Inc.’s ratings and the negative outlook just assigned.

The outlook is negative. The agency noted the outlook indicates a forecast for elevated debt leverage over the next 12 months, with S&P Global Ratings-adjusted debt to EBITDA between 6x-7x in 2022.

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