TEXT-S&P affirms Momentive Performance Materials 'CCC' rating

Mon Dec 10, 2012 4:24pm EST

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Overview
     -- Albany, N.Y.-based silicone and quartz producer Momentive Performance 
Materials Inc. (MPM) has completed a first-priority notes offering and related 
refinancing of certain debt.
     -- We are affirming our 'CCC' corporate credit rating on MPM.
     -- We are lowering our rating on the company's 1.5 lien notes to 'CC' 
from 'CCC' and removing them from CreditWatch. We are also revising the 
recovery rating on these notes to '6' from '4'.
     -- We are affirming all our other issue ratings.
     -- The negative outlook reflects our view that the company's debt load is 
unsustainable at the current earnings level. We will likely lower the ratings 
in the next several quarters unless earnings improve significantly.

Rating Action
On Dec. 10, 2012, Standard & Poor's Ratings Services affirmed its 'CCC' 
corporate credit rating on MPM. 

At the same time, we lowered our rating on the company's 1.5 lien notes to 
'CC' (two notches below the corporate credit rating) from 'CCC' and removed 
them from CreditWatch, where we had placed them with negative implications on 
Oct. 11, 2012, upon announcement of the refinancing and based on our updated 
recovery analysis. We are revising the recovery rating on these notes to '6' 
from '4', indicating our expectation of negligible (0%-10%) recovery in the 
event of a payment default. 

We are affirming all our other issue ratings. The outlook remains negative. 

Rationale
These rating actions follow MPM's successful placement of $1.1 billion of 
first-priority senior secured notes due 2020 and its use of the proceeds to 
repay revolving and term loan borrowings and its $200 million 12.5% 
second-lien notes due 2014. After satisfaction of the escrow conditions, these 
first-priority notes, originally issued by escrow subsidiaries, became 
obligations of MPM. In addition, following repayment of the second-lien notes, 
the company's existing second-priority springing lien notes became secured, 
but the 'CC' issue rating and '6' recovery rating on these notes did not 
change.

We assume the company will execute its plan to enter into a new five-year $300 
million revolving asset-based loan (ABL) facility to replace its existing 
revolving credit facility maturing in December 2014 and $35 million synthetic 
letter of credit facility maturing in December 2013. 

In our view, leverage is unsustainably high, with total adjusted debt of about 
$4.1 billion and debt-to-EBITDA above 20x. Our debt adjustment totals about $1 
billion and includes pay-in-kind (PIK) seller notes at MPM's direct parent 
company, Momentive Performance Materials Holdings Inc. (unrated), tax-adjusted 
unfunded postretirement obligations, and capitalized operating leases. 

The ratings on MPM reflect the company's "highly leveraged" financial profile 
and what we deem to be a "fair" business risk profile. Our assessment of the 
company's management and governance is "fair". MPM's debt and leverage have 
been high ever since controlling shareholder Apollo Global Management L.P. 
acquired the company from General Electric Co. in 2006. But, beginning in the 
second half of 2011, earnings and cash flow weakness have caused leverage to 
reach very aggressive levels. Earnings challenges stem from:

     -- Overcapacity in silicones, which has resulted in very competitive 
pricing;
     -- A slowdown in the semiconductor industry, leading to lower demand for 
quartz;
     -- Customer inventory reductions in late 2011; and
     -- Weaker economic conditions in Europe and China.
 
We estimate that during the first three quarters of 2012, pro forma for costs 
associated with the recent refinancing, the company used about $200 million of 
cash. Our base case assumes that, despite steps to lower operating costs and 
working capital, free operating cash flow will continue to be negative for at 
least the next several quarters. 

Key assumptions for full-year 2012 include:
     -- $100 million of capital spending;
     -- Pension funding of $19 million; 
     -- A total of about $65 million for financing costs and restructuring 
outlays to achieve synergies with Momentive Specialty Chemicals Inc. (MSC; 
B-/Stable/--), which is owned by the same parent holding company; and
     -- Working capital becoming a slight source of cash for the full-year 
2012. However, this could change if raw material costs spike. 
 
We expect debt to continue to increase both to fund the shortfall in free 
operating cash flow and as a function of the PIK feature of the seller note at 
the parent holding company. Consequently, we believe debt leverage will remain 
unsustainably high during the next several quarters, increasing the likelihood 
of a default or debt restructuring in the absence of a meaningful reversal of 
business trends. Moreover, MPM has considerably more debt than its primary 
competitors, which could erode its competitiveness over time if it impedes 
sufficient business reinvestment.

MPM is a large producer of silicones (representing more than 90% of sales and 
about 75% of EBITDA in 2011), which are used in a wide variety of 
applications. MPM also produces quartz, which is used primarily in 
semiconductors. Construction, transportation, personal care, electronics, and 
agriculture utilize silicones. They are generally used as an additive, 
providing or enhancing attributes, such as resistance (to heat, ultraviolet 
light, or chemicals), lubrication, adhesion, or viscosity. Positive industry 
factors include significant consolidation and historically above-average 
growth rates. MPM benefits from good diversification by end market and region, 
as well as an increasing contribution from specialty products. However, 
sluggish demand and significant capacity additions in 2011 have resulted in 
oversupply and very competitive pricing. As a result, MPM's EBITDA margins 
have dropped sharply from a peak of about 19% to below 10%. 

Liquidity
The recent refinancing increased the absolute amount of liquidity slightly and 
considerably extended debt maturities, and the planned ABL facility would 
eliminate maintenance financial covenants. We nevertheless continue to regard 
liquidity as "weak" as defined in our criteria. This is because at the current 
earnings level, we expect the company's free operating cash flow to be 
negative for at least the next several quarters and for liquidity to therefore 
contract. In our base-case forecast, EBITDA is just below $200 million in 2012 
(somewhat higher as calculated under the financial covenant in MPM's existing 
credit facilities). If EBITDA is flat or increases only slightly in 2013, we 
believe sources of liquidity will be insufficient to cover projected uses by 
the end of 2013.

MPM intends to enter into a new $300 million ABL revolving credit facility 
maturing in 2017 to replace its existing $300 million revolver and $35 million 
synthetic letter of credit (L/C) facility ($33 million of L/Cs outstanding). 
It has obtained $270 million in commitments from financial institutions and 
expects to obtain an additional $30 million. Pro forma for all the elements of 
the refinancing, including entry into the new revolver, we estimate liquidity 
as of Sept. 30, 2012, at about $330 million. This included $146 million of 
cash and $184 million of borrowing capacity (after deducting $78 million of 
L/C's issued plus borrowing base restrictions of $37.5 million or 12.5% of the 
facility amount). If the credit facility refinancing is completed as currently 
structured, MPM would have no significant debt maturities until 2016.

Recovery analysis
If the company enters into the new $300 million ABL facility as planned, the 
ratings on its existing rated debt will remain unchanged. Its first-priority 
senior secured notes are rated 'CCC+' (one notch above the corporate credit 
rating) with a recovery rating of '2', indicating prospects for substantial 
(70% to 90%) recovery in the event of a payment default. All its other debt, 
including its 1.5 lien notes, second-priority notes, and subordinated notes, 
is rated 'CC' (two notches below the corporate credit rating), with a recovery 
rating of '6', denoting prospects for negligible (0% to 10%) recovery in the 
event of a payment default. The senior secured revolver and synthetic bank 
loan are rated 'B-', with '1' recovery ratings; we expect these facilities to 
be replaced by the ABL revolver. For the full recovery analysis, please see 
our recovery report on MPM published on The Global Credit Portal on Oct. 16, 
2012.

Outlook
The negative outlook reflects our expectation that silicone overcapacity and a 
tepid global economy will cause MPM's free operating cash flow to be negative 
for at least the next several quarters, causing liquidity to contract. We are 
likely to lower the ratings during the next several quarters if industry 
conditions fail to improve sufficiently to enable MPM to achieve cash flow 
neutrality and stabilize liquidity, heightening the probability of a payment 
default. We could also lower the ratings sooner if the proposed $300 million 
ABL and notes financing is not completed as currently structured, or if the 
company voluntarily restructures or repurchases its debt in such a way that 
results in anything less than full and timely repayment.

On the other hand, we could revise the outlook to stable if earnings and cash 
flow strengthen, leverage declines, and liquidity stabilizes at a level we 
consider adequate.


Related Criteria And Research
     -- 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
     -- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 
'CC' Ratings, Oct. 1, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011 

Ratings List

Ratings Affirmed

Momentive Performance Materials Inc.
 Corporate Credit Rating                CCC/Negative/--    

Momentive Performance Materials Inc.
 Senior Secured
  US$1.161 bil  second priority         CC                 
  springing lien nts due 01/15/2021     
   Recovery Rating                      6                  
  EUR150 mil 9.50%  second priority     CC                 
  springing lien nts due 01/15/2021     
   Recovery Rating                      6                  
 Subordinated
  Local Currency                        CC                 
  Recovery Rating                       6                  6

Momentive Performance Materials Inc. 
 Senior Secured (First-priority notes)
  Local Currency                        CCC+               CCC+ 
  Recovery Rating                       2                  2

Momentive Performance Materials GmbH
Momentive Performance Materials USA Inc.
 Senior Secured
  US$300 mil revolv credit fac  bank    B-                 B- 
  ln due 12/03/2014                     
   Recovery Rating                      1                  1
  US$35 mil synthetic ltr or credit     B-                 B- 
  bank ln due 12/04/2013                
   Recovery Rating                      1                  1

Rating Lowered; CreditWatch/Outlook Action                                     
  
                                        To                 From
Momentive Performance Materials Inc.
 Senior Secured (1.5-lien notes)
  Local Currency                        CC                 CCC /Watch Neg
  Recovery Rating                       6                  4

Ratings Withdrawn
                                        To                 From
Momentive Performance Materials Inc.
Momentive Performance Materials GmbH

Senior Secured
  US$436.41 mil term bank ln due        NR                 B- 
  05/05/2015                            
   Recovery Rating                      NR                 1
  EUR294.38 mil term bank ln due        NR                 B- 
  05/05/2015                            
   Recovery Rating                      NR                 1
  US$200 mil  12.50% 2nd lien nts due   NR                 CC 
  06/15/2014                            
   Recovery Rating                      NR                 6

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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