TEXT-S&P: TPC Group ratings remain on watch negative

Tue Dec 4, 2012 5:27pm EST

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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implications, and will be withdrawn upon successful close of the transaction 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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