TEXT-S&P: TPC Group ratings remain on watch negative
Overview -- Houston-based chemical company TPC Group LLC has agreed to be acquired by private equity firms First Reserve Corp. and SK Capital Partners in a leveraged buyout (LBO) valued over $900 million, including assumed debt. -- The ratings on TPC, including the 'B+' corporate credit rating, remain on CreditWatch with negative implications, where we placed them on Aug. 27, 2012. -- We are assigning issue-level ratings of 'B' to the proposed $655 million senior secured notes, which are being issued by TPC Group Inc. -- Upon completion of the acquisition, we expect to lower the corporate credit rating on TPC to 'B' from 'B+' and assign a stable outlook. Rating Action On Dec. 4, 2012, Standard & Poor's Ratings Services said that its ratings on TPC Group LLC, including the 'B+' corporate credit rating, remain on CreditWatch with negative implications, where we placed them on Aug. 27, 2012. The initial CreditWatch placement followed the announcement that TPC has entered into an agreement to be acquired by First Reserve Corp. and SK Capital Partners at $40 per share. The ratings have remained on CreditWatch, as the proposed acquisition price has been increased by First Reserve and SK, in light of nonbinding offers of interest from a second interested party, Innospec Inc. We also assigned our 'B' issue-level rating (same as the expected CCR) to TPC Group Inc.'s proposed $655 million senior secured notes, with a recovery rating of '4', indicating our expectation of average (30% to 50%) recovery in the event of a payment default. The 'B+' issue-level ratings on the existing $350 million senior secured notes remain on CreditWatch with negative implications, and will be withdrawn upon successful close of the transaction after they have been repaid. Rationale The CreditWatch update follows the announcement that Innospec was withdrawing its offer to acquire TPC, and that the company's Board of Directors urged its shareholder to vote for the acquisition by First Reserve and SK Capital at $45 per share. The acquisition is expected to be funded through the issuance of $655 million in senior secured notes and $455 million of common equity; the new $250 million ABL (unrated) is expected to be undrawn at close. We expect that First Reserve will be the majority owner at close of the proposed transaction. The shareholder vote will be held on Dec. 5, and 50.1% approval is necessary for the transaction to go through. All regulatory approvals required to consummate the transaction have been received, and assuming the shareholders approve the deal, the transaction is expected to close by year-end. The expected one-notch downgrade reflects the weakening in credit metrics as a result of the LBO, with total adjusted debt-to-EBITDA expected to approach 6x, and funds from operations (FFO)-to-total debt of about 10%, pro-forma for the proposed transaction. Accordingly, we have revised our assessment of the financial risk profile to "highly leveraged" from "aggressive". The downgrade also reflects the company's financial policies as "very aggressive", highlighted by the resulting ownership by two private equity firms, as well as aggressive capital spending plans over the next two years. The company recently received funding approval from its Board of Directors for the restart of one of its idled dehydrogenation units to produce on-purpose isobutylene. We expect that the majority of estimated $265 million in capital spending associated with this project will take place over the next two years. We anticipate that the company will generate negative free cash flow through 2014 due to the increased capital expenditures, and expect that the company will preserve adequate liquidity as the spending is funded through a combination of cash on hand and ABL drawings. The project is expected to be operational in the latter part of 2014. With annual revenues of about $2.4 billion, TPC aggregates and processes crude C4 to produce commodity chemicals, including butadiene, and butene-1. Butadiene, the company's main product, is an input in U.S. synthetic rubber production, most of which the cyclical domestic tire industry consumes. Because of the current cost advantage of processing natural gas liquids, such as ethane versus heavier crude oil-based feedstocks for ethylene production, supplies of C4 (an ethylene by-product) remain constrained relative to demand. Although butadiene prices can fluctuate meaningfully, we expect them to remain high compared with historical prices because of the shift towards cracking cost advantaged light feedstocks. CreditWatch We will monitor developments relating to this transaction and will resolve the CreditWatch listings if the acquisition closes. If the transaction closes as currently structured, we expect to lower TPC's corporate credit rating to 'B' from 'B+'. Conversely, if the transaction does not proceed, we would likely affirm the existing ratings on TPC Group at their current levels and withdraw the issue-level ratings on the $655 million senior secured notes. Related Criteria And Research -- Methodology and Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Key Credit Factors: Business And Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008 Ratings List Ratings Affirmed TPC Group LLC Corporate Credit Rating B+/Watch Neg/-- Ratings Affirmed TPC Group LLC Senior Secured Local Currency B+ /Watch Neg Recovery Rating 4 New Rating TPC Group, Inc. Senior Secured US$655 mil sr secd nts due 2020 B Recovery Rating 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.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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