1. Research Update:
Momentive Performance Materials
USA Inc. Debtor-In-Possession Term
Loan Rated 'BB-' Point-In-Time
Primary Credit Analyst:
Cynthia M Werneth, CFA, New York (1) 212-438-7819; cindy.werneth@standardandpoors.com
Secondary Contact:
Paul J Kurias, New York (1) 212-438-3486; paul.kurias@standardandpoors.com
Recovery Analyst:
John W Sweeney, New York (1) 212-438-7154; john.sweeney@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rating Framework Summary
Rationale
Related Criteria And Research
Ratings List
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2. Research Update:
Momentive Performance Materials USA Inc.
Debtor-In-Possession Term Loan Rated 'BB-'
Point-In-Time
Overview
• We have assigned our point-in-time 'BB-' rating to the
debtor-in-possession (DIP) term loan facility provided to Momentive
Performance Materials USA Inc., a subsidiary of Momentive Performance
Materials Inc. (MPM), a specialty chemicals and materials producer that
is currently operating under the protection of Chapter 11 of the U.S.
Bankruptcy Code.
• A DIP issue rating reflects our view of the likelihood of full cash
repayment through the company's reorganization and emergence from Chapter
11 and can be enhanced if we believe the debt is likely to be fully
repaid from the liquidation of its collateral if the company cannot
successfully reorganize.
• Our DIP issue rating for MPM incorporates our 'B+' assessment of the
likelihood of full cash repayment through MPM's reorganization and
emergence from Chapter 11. We then applied a (one-notch) enhancement
based upon our assessment of recovery prospects in a liquidation scenario
to reach the 'BB-' issue rating.
• We consider MPM as having a "weak" business risk profile based on
industry overcapacity, as well as a severe decline in operating
profitability and underinvestment in recent years, and we regard the
current operating environment to be challenging. Even so, no operational
restructuring is needed, liquidity appears sufficient, and the DIP
financing is relatively modest compared to the enterprise value. Together
these factors support our 'B+' assessment of the likelihood of full cash
repayment at emergence.
• In a liquidation scenario, we estimate implied coverage relative to the
maximum DIP exposure of $570 million would be 140%, assuming the $70
million standby letters of credit under the DIP asset-backed loan (ABL)
become funded/cash collateralized.
• This rating is only valid for the date of publication of this report.
• On April 13, 2014, MPM and certain of its U.S. subsidiaries filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. On April
14, 2014, the U.S. Bankruptcy Court in the Southern District of New York
issued an interim order that authorized the company to borrow up to $430
million of the $570 million DIP facilities. It is anticipated that on or
about May 23, 2014, the bankruptcy court will issue a final order
authorizing access to the full amount under the DIP facilities. The DIP
facilities constitute super-priority administrative expense claim status,
which allows the lenders to demand full cash repayment as a condition for
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3. the company to reorganize and emerge from bankruptcy. The unrated DIP
facility revolving credit agreement includes the option for it to be
converted to an exit facility. However, we do note that the $270 million
ABL DIP revolver facility can only be converted to a five-year exit
facility if certain conditions are met.
• MPM, a developer and manufacturer of silicones, products derived from
quartz, and specialty ceramics, is currently operating in Chapter 11
protection via debtor-in-possession (DIP) financing of $130 million under
a one-year, $270 million asset-based lending (ABL) facility and a
one-year, $300 million term loan facility. The total DIP financing is
anticipated to total $570 million, which assumes the company receives
timely approval by way of the final order from the U.S. Bankruptcy Court
for the remaining $140 million of availability under the DIP ABL
financing.
• The $270 million DIP ABL Facility (unrated) will consist of a $200
million tranche A-LIFO revolver (multi-currency borrowings) and a $70
million tranche B-FILO revolver (solely U.S. dollar borrowings).
Approximately $70 million of the tranche A revolver will backstop and
cash collateralize prepetition letters of credit that support workmen's
compensation, performance, and trade. Tranche A drawings may only be made
when tranche B is fully drawn. Tranche B revolver availability will
support modest, albeit additional advances against accounts receivable
and inventory as well as advances against machinery and equipment.
• The unrated DIP revolver (tranche A and B) is secured by a priming first
lien on all accounts receivable, inventory, and cash. Tranche B is also
secured by machinery and equipment attributed to certain foreign
borrowers (Germany and Canada). The DIP revolver retains a
second-priority priming lien on all term loan collateral. The DIP term
loan is secured by a priming first-lien on all property, plant, and
equipment and other assets and a second-priority priming lien on the ABL
collateral of the domestic loan parties. While both the DIP term loan and
DIP revolver facility have super-priority administrative expense claim
status, it is our understanding that the unrated DIP revolver could be
converted to an exit facility if certain conditions are met.
(Watch the related CreditMatters TV segment titled, "What’s Behind Standard &
Poor’s Point-In-Time, Debtor-In-Possession Rating On Momentive Performance
Materials' Term Loan Facility," dated May 28, 2014.)
Rating Action
On May 15, 2014, Standard & Poor's Ratings Services assigned its point-in-time
'BB-' rating to Momentive Performance Materials USA Inc.'s "new money" $300
million DIP term loan facility due the earlier of April 2015 or the effective
date of the company's plan of reorganization. Since the DIP term loan facility
rating is a point-in-time rating, it is effective only for the date of this
report, and we will not review, modify, or provide ongoing surveillance of the
rating.
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Research Update: Momentive Performance Materials USA Inc. Debtor-In-Possession Term Loan Rated 'BB-' Point-
In-Time
4. Rating Framework Summary
The rating is established using our global corporate criteria (see "Corporate
Methodology," published Nov. 19, 2013, on RatingsDirect) and our criteria
article "Principles of Credit Ratings," published Feb. 16, 2011).
Under this approach, we have assessed the credit risk of the DIP loan by
evaluating:
• The likelihood a company will be able to successfully reorganize and
emerge from bankruptcy as a going concern and be able to attract
sufficient exit financing to fully repay the DIP financing at emergence.
This evaluation forms the anchor for the DIP issue rating.
• The potential for a company to repay the DIP financing through the
liquidation of assets, assuming it is unable to successfully reorganize
and emerge from bankruptcy. We assume DIP financing is sufficiently
over-collateralized to be fully repaid in a liquidation analysis and may
benefit from a one- or two-notch enhancement over the anchor score,
depending on our estimated level of coverage.
Taken together, a DIP issue rating captures our analytical assessment of the
viability (reorganizability) of a company's business and the amount of the DIP
obligation relative to the company's value--both as a reorganized entity and
on a liquidation basis.
A more complete discussion of the framework for our analysis is provided at
the end of this report in the "Ratings Framework" section at the end of this
article.
Rationale
Key elements of our assessment of the company's ability to reorganize and
fully repay the DIP loan at emergence include:
• Our assessment of MPM's restructuring requirements and challenges;
• The company's business position and outlook;
• The adequacy of its liquidity during bankruptcy; and
• The extent to which MPM's going-concern value exceeds the expected DIP
loan exposure.
This analysis includes, among other things, a review of the senior secured DIP
and exit ABL credit agreement dated April 15, 2014, the senior secured DIP
term loan credit agreement dated April 15, 2014, the interim order issued by
the U.S Bankruptcy Court dated April 14, 2014, and the company's cash flow
forecasts. The DIP term loan credit agreements do not allow the debtors or
obligate the lenders to convert the DIP loan to an exit financing; however, we
note the DIP ABL credit agreement allows the company to convert this facility
to a five-year exit facility only upon certain conditions being met.
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Research Update: Momentive Performance Materials USA Inc. Debtor-In-Possession Term Loan Rated 'BB-' Point-
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5. The DIP financing is important to MPM since it will allow the company to roll
up letters of credit for counterparties during the pendency of the bankruptcy
as well as for liquidity purposes in order for MPM to meet operating and
capital needs during bankruptcy.
MPM's recent bankruptcy filing was prompted by a number of factors, including:
• 51% last-12-months EBITDA decline from $492 million (fiscal 2010) to $240
million (fiscal 2013);
• The foregoing cash flow decline, coupled with a highly leveraged balance
sheet, impaired the company's ability to service its debt obligations;
• A fundamental shift in industry dynamics, i.e., overcapacity, new
participants and product commoditization; and
• Reduced demand in two key customer segments: (i) silicone: automotive,
building, construction and electronics, and (ii) quartz: semiconductors
and electronics.
Our assessment of MPM's weak, but improving, business risk profile leads us to
believe that the company will remain a viable business upon emergence from
bankruptcy.
The following factors support our assessment of a "weak" business risk
profile:
• Industry overcapacity;
• A severe decline in operating profitability;
• Underinvestment in recent years;
• No operational restructuring is needed;
• Liquidity appears sufficient, and the DIP financing is relatively modest
compared to the enterprise value; and
• Broad-based industry diversification and its position as a global
silicone producer.
In our view, the DIP financing, as contemplated, provides the company with
sufficient liquidity to effectively manage and conduct its business throughout
the bankruptcy process. It is projected that MPM will pay adequate protection
payments to its prepetition first-lien and 1.5-lien creditors while funding
working capital, administrative fees and expenses, and other corporate
expenses. We note the company anticipates emerging after six months in
bankruptcy (October 2014), and it projects to have approximately $190 million
of liquidity with nearly one-third of this amount reflecting DIP ABL
borrowings. If MPM were to experience very tight liquidity due to a prolonged
Chapter 11 process or further deterioration in business conditions, it could
upsize the DIP if allowed and/or file an amended motion with the bankruptcy
court that would seek to halt the adequate protection payments being made to
its first-lien and 1.5-lien prepetition creditors.
While we believe that reorganization is a more likely scenario for MPM than
liquidation, the operating environment is challenging and a material
deterioration in operating conditions could make restructuring and repaying
the DIP loan in full challenging. Risks to the operating outlook: include:
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Research Update: Momentive Performance Materials USA Inc. Debtor-In-Possession Term Loan Rated 'BB-' Point-
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6. • Global silicone capacity continues to far exceed actual demand, which
could continue to depress prices and result in cash burn; and
• A secular decline in demand for silicone, which we regard as less likely.
In assessing the likelihood that MPM will fully repay the DIP financing
through its reorganization and emergence, we assumed that:
• $300 million would be outstanding under the DIP term loan, reflecting our
assumption that none of the outstanding principal would be prepaid prior
to emergence.
• Approximately $100 million to $150 million in DIP ABL cash borrowings
would be outstanding depending on working capital needs and the timing of
interest payments at the point in time of the company's emergence from
bankruptcy. This amount takes into consideration the borrowing base,
minimum cash reserves, and other availability limitations pursuant to the
DIP credit agreement, and reflects the amount we estimate would be
replaced and rolled up into a five-year exit facility.
• Approximately $70 million of letters of credit under the $270 million DIP
ABL facility would remain outstanding and undrawn during the Chapter 11
proceeding, and the company would replace and roll up these letters of
credit upon emergence as part of a contemplated five-year exit facility.
We believe the going-concern value of a reorganized MPM at approximately $1.6
billion, which represents our estimate of a 6x multiple of $260 million of
emergence EBITDA. As such, this value greatly exceeds the amount of DIP
financing it would have to repay in full in cash upon emergence. This should
help the company attract exit financing to fully repay the DIP term loan in
cash at emergence. Going forward, the extent of that coverage cushion remains
somewhat difficult to assess beyond a six-month timeframe (i.e., the company's
anticipated time in Chapter 11 bankruptcy). In our view, a certain degree of
uncertainty surrounds what the emergence capital structure would be due in
part to the global volatility in the sectors in which the company operates as
well as the uncertainties relating to MPM's potential cost savings, operating
cost reductions and capital investment requirements.
As previously mentioned, we have assumed that the total DIP ABL and term loan
balance outstanding at emergence would total $400 million to $450 million. We
do not think that the company will have any drawings against its $70 million
of standby letters of credit issued and outstanding under the ABL revolver. As
such, this DIP exposure, when taken in its entirety, represents 25% to 30% of
our estimated enterprise value.
A Standard & Poor's rating on a DIP facility reflects our view of the
likelihood of full cash repayment through the company's reorganization and
emergence from Chapter 11. A DIP facility rating also typically acknowledges
potential rating enhancement if we believe the assets securing the facility
would likely result in full recovery if liquidation becomes necessary.
On the basis of the analytical considerations described above, our DIP rating
reflects a 'B+' risk assessment of the likelihood that MPM will repay the DIP
lenders in cash in full at the point of its reorganization and emergence from
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Research Update: Momentive Performance Materials USA Inc. Debtor-In-Possession Term Loan Rated 'BB-' Point-
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7. Chapter 11.
Valuation coverage in liquidation
We assessed prospects for repayment of DIP principal if MPM cannot reorganize
and if the bankruptcy proceeding is converted into a Chapter 7 or Chapter 11
liquidation. We believe this is most likely to happen if operating conditions
and the company's competitive position materially worsen and cause the company
to significantly underperform and exhaust all of its liquidity.
Under this scenario, while certain of MPM's silicone and quartz assets and
operations would remain important to the markets it serves, our liquidation
analysis assumes a "fire sale" situation although it is very possible that the
silicone and quartz operations could be spun off separately. For this, we
assume EBITDA meaningfully declines to $200 million, and the company's ability
to obtain a fair price on the sale of these two operations is compromised. As
such, we assume a 4x multiple, compared with the 6x multiple assumed in the
above-mentioned going-concern valuation. The lower multiple is intended to
reflect the harsher operating conditions and more significant industry
overcapacity inherent in our liquidation scenario which could make the
company's weaker plants less valuable. This results in a gross enterprise
valuation of $800 million, which is 50% lower than our going concern
valuation.
When taking into consideration these "harsh" assumptions, the liquidation
value still provides ample coverage of the DIP facility. Implied coverage
relative to the maximum DIP exposure of $570 million would be 140%, assuming
the $70 million standby letters of credit under the DIP ABL become funded/cash
collateralized.
Our liquidation analysis also considered an asset liquidation scenario,
although we feel this is a less likely outcome given the company's size and
position in the market. Even so, it provides some context that our liquidation
sale valuation is a reasonable floor for the value of the business. When
assessing the value of the company's working capital and fixed assets on a
liquidation basis, with no value ascribed to intangibles and/or goodwill, and
noting the foregoing assumptions, we conservatively estimated the following
values: (i) $230 million to accounts receivable; (ii) $220 million to
inventory and (iii) $300 million to net plant, property and equipment. This
results in a net orderly liquidation value of $750 million against $570
million of funded DIP exposure, providing for 1.3x coverage. However, we
believe the value ascribed to the property, plant and equipment would not be
readily realizable and would take longer to convert to cash. Coverage from the
more liquid receivables and inventory only would be roughly 80%.
As such, we applied a one-notch enhancement to our underlying risk assessment
of 'B+', which results in an overall DIP term loan facility rating of 'BB-.'
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Research Update: Momentive Performance Materials USA Inc. Debtor-In-Possession Term Loan Rated 'BB-' Point-
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8. Ratings framework
Because adequate funding is critical to a company's potential for
reorganization and emergence from bankruptcy as a viable entity, the U.S.
Bankruptcy Code provides incentives for lenders to finance companies operating
under the protection of Chapter 11. Such post-petition financing is known as
DIP financing.
Our criteria for rating DIP financing extended to companies in bankruptcy
employs the conceptual framework developed for bank loan ratings. The analysis
for DIP financing consists of two parts:
• The first focuses on timely repayment.
• The second focuses on the particulars of the specific transaction and the
potential for recovery of that debt in the event liquidation (a shift to
Chapter 7) becomes necessary.
Timely payment
In the case of DIP transactions, timely payment of principal occurs through
the DIP reorganization, its emergence from Chapter 11, and repayment of the
DIP financing. Such payment is considered "timely" and in accordance with the
terms of the agreement--notwithstanding the possibility of a stated earlier
maturity--in keeping with the normal expectations. DIP lenders generally are
tied in for the duration of the reorganization process.
This part of the analysis considers the likelihood of reorganization. A
favorable assessment is likely for viable companies, particularly for large,
established entities. If the operation is fundamentally healthy, but the
company is saddled with debt because of an leveraged buyout, a
recapitalization, or an overpriced acquisition, its ability to service a more
appropriate debt load via reorganization might be quite strong.
However, if there were any significant doubt about the company's viability or
its ability to attract sufficient cash to fully repay a DIP financing at the
end of the restructuring process, the result probably would be a low
speculative-grade outcome. A failed company in an industry with poor
fundamentals or with a seriously flawed business model would be a lesser
candidate for rehabilitation and refinancing. Given this, a company assessed
as having a vulnerable business risk profile based on its restructuring (see
"Corporate Methodology") would not be rated higher than 'B+', before
considering potential enhancement for full coverage in a liquidation scenario.
Accordingly, much of the analysis is identical to the fundamental corporate
credit analysis relating to a company in the context of its particular
industry. This analysis focuses on the supply-and-demand forecasts for the
company's products, its market position, operating history, current cash flow,
and ability to operate profitably once it has a manageable capital structure.
These factors are much the same as what we would consider in assigning a
credit rating to a nonbankrupt company. Of course, the impact of the
bankruptcy itself--on the company's business relationships with its customers,
its vendors, and its employees--is critical in the case of DIP financing.
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Research Update: Momentive Performance Materials USA Inc. Debtor-In-Possession Term Loan Rated 'BB-' Point-
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9. One important difference between a DIP facility and other instruments we rate
is the relatively short time horizon for a DIP transaction (often six months
to two years), which obviates some of the longer-term considerations factored
into traditional ratings. In rating a DIP financing, we focus on longer-range
factors only to the extent they affect the company's ability to reorganize and
attract sufficient new capital to fully repay the DIP financing at emergence.
Once the company has filed for Chapter 11 protection, prepetition debt service
usually is suspended. Obviously, there will be debt service on the rated
financing, and there may be other obligations the court has approved for
continuing payment. If there is secured debt, the company generally will
accrue post-petition interest--even if no cash payments are being made--to the
extent the value of the security exceeds the amount of the debt. It is
imperative to be aware of any motions that may be filed on behalf of
prepetition creditors to receive payment of their claims and adequate
protection for their position or to otherwise contest the DIP financing. The
company may be planning asset sales, store closings, or lease cancellations,
all of which could have a bearing on the level of cash flow the company can
generate and its attractiveness as a viable candidate for fresh financing to
take out the DIP lenders.
Collateral and ultimate recovery
The second part of the rating analysis looks at the particulars of the
specific financing and its recovery potential in the event of liquidation. As
with collateralized financings to nonbankrupt companies, the rating may be
enhanced by one or two notches if there is a reliable second way out. Strong
legal protection is a hallmark of DIP lending, and so it would be normal to
expect some enhancement of the DIP loan rating: Thus, the rating is anchored
by the perceived likelihood of reorganization and supplemented by the
potential for recovery through asset liquidation. We analyze collateral with a
focus on its ability to retain value through a liquidation process. A
conservative valuation of the collateral should cover the loan by a safe
margin. This would be the case if the company entered Chapter 7. Receivables
and inventory often are the collateral supporting typical industrial DIP
financings. This collateral is among the most liquid types and conservative
borrowing bases typically govern them.
Related Criteria And Research
Related Criteria
• Corporate Methodology, Nov. 19, 2013
• Principles Of Credit Ratings, Feb. 16, 2011
Ratings List
New Rating
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Research Update: Momentive Performance Materials USA Inc. Debtor-In-Possession Term Loan Rated 'BB-' Point-
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10. Momentive Performance Materials USA Inc.
Senior Secured $300 Million DIP Term Loan BB- (point-in-time)
Complete ratings information is available to subscribers of RatingsDirect at
www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by
this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.
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Research Update: Momentive Performance Materials USA Inc. Debtor-In-Possession Term Loan Rated 'BB-' Point-
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