TEXT-S&P rates Taminco Acquisition notes
Overview -- Allentown Pa.-based Taminco Global Chemical Corp.'s parent company Taminco Acquisition Corp. is issuing $250 million in senior unsecured notes. The company will use proceeds to pay a cash distribution to equity sponsors Apollo Global Management and its affiliates. -- We are assigning our 'B-' rating to the proposed notes. -- We are affirming our existing ratings on Taminco Global Chemical Corp., including the 'B+' corporate credit rating. -- The stable outlook indicates our expectation that credit measures will remain appropriate for the ratings despite an increase in debt due to the proposed issue, as well as our belief that management and ownership will support credit quality. Rating Action On Dec. 14, 2012, Standard & Poor's Ratings Services assigned its 'B-' issue rating and '6' recovery rating to Taminco Global Chemical Corp.'s parent company Taminco Acquisition Corp.'s proposed $250 million unsecured notes due 2017. The proposed notes have pay-in-kind (PIK) options on interest payments. The '6' recovery rating indicates our expectation for negligible (0%-10%) recovery for creditors in the event of a payment default. Ratings are based on preliminary terms and conditions. We expect proceeds from the issue to fund an approximately $244 million cash distribution to the equity sponsor Apollo Global Management and its affiliates. At the same time, we affirmed our existing ratings--including our 'B+' corporate credit rating on the company. The outlook is stable. We also affirmed our 'BB-' issue rating and '2' recovery rating on the company's existing first-lien senior secured facility consisting of a $194 million revolving credit facility and $509 million term loan. In addition we affirmed our 'B-' issue rating and '6' recovery rating on the company's $400 million second-priority notes. The '2' and '6' recovery ratings indicate our expectation for substantial (70%-90%) recovery for the first-lien creditors and negligible (0%-10%) recovery for second-lien creditors, in the event of a payment default. Rationale Standard & Poor's Ratings on Allentown Pa.-based Taminco Global Chemical Corp. reflect the company's "aggressive" financial risk profile, and its "satisfactory" business risk profile as a market leading producer of alkylamines and alkylamine derivates in a niche global market. Our assessment of the financial risk profile reflects our expectation that the ratio of total debt-to-EBITDA will remain below 5x in 2013. We include the proposed debt at Taminco's parent company in our assessment of its credit quality. Accordingly, we anticipate that this key credit metric will remain appropriate at the rating despite the increase in debt as a result of the proposed debt issue. This is partly because we assume a modest improvement in EBITDA and cash flow in 2013 relative to 2012. We also anticipate that new products, and ongoing attempts at improving product mix, will contribute to this improvement. Over the years, Taminco has increased the proportion of value-added derivatives in the overall product mix, a trend that should support its high margins. We view financial policy as aggressive and do not expect a meaningful improvement in the financial risk profile as a result. However, we do not anticipate significant increases in debt for shareholder rewards or to fund growth investments. Apollo acquired privately owned Taminco in February 2012. In our view, Taminco has a favorable, sustainable, recession-resilient market position that has contributed to stable EBITDA margins around the 20% level over the past few years, including during the recession of 2008 and 2009. We expect Taminco to remain resilient to economic downturns partly due to the relatively stable demand from its end markets, including nutrition, oil and gas production, water treatment, and agrochemicals. During the 2008-2009 global economic downturn, EBITDA and volumes held up reasonably well. The company has a diversified end market mix and favorable long-term growth prospects. Contributing to growth in some measure is a trend in at least some sections of Taminco's potential customer base to replace in-house sourcing of its amine and amine derivative requirements with external sourcing from producers such as Taminco. The company's large and well-integrated production capacity is an important competitive advantage that provide economies of scale in sourcing raw material, and contributes to its market leadership position. A highly concentrated industry with generally rational pricing supports the company's margins. Taminco has robust market shares in most of its markets. It is able to pass on feedstock and energy prices because of contractual clauses in many (but not all) of its contracts, which supports high margins. In addition, the industry operates on a regional basis because transportation costs are high. Taminco is well-positioned in terms of geographic mix, with a significant presence in North America and Europe and a growing manufacturing base in China. These strengths are tempered by our opinion that the company operates in a niche industry with a relatively narrow product focus on alkyl amines and their derivatives, and therefore should continue to have a moderate revenue, EBITDA, and FFO base. Though its products do not currently appear to have economical substitutes, the future development of potential substitutes is a modest risk in the long term given the product concentration. While the industry is concentrated, the group competes against some very large players. Chinese firms have so far been only modest competitors, but this might change in the long term. Taminco was spun off from UCB (Union Chimique Belge; not rated) in 2003. Liquidity We classify the company's liquidity as "adequate." Under our base-case credit scenario, we expect sources to comfortably surpass needs by more than 1.2x. Our assessment assumes the proposed notes offering will proceed in line with the terms and conditions presented to us. We incorporate the following assumptions in our base-line scenario: -- We expect liquidity to remain adequate, with access to long-term committed bank lines, reasonable cushions under a springing maximum net first-lien ratio of 3.75x, and a long-dated debt maturity profile; -- There will no material dividends or shareholder rewards or capital spending changes that weakens liquidity; -- The company's $194 million revolving credit facility maturing 2017 and its Euro 100 million factoring facility are important sources of liquidity. The revolving credit facility has remained largely undrawn, and is mainly utilized for letters of credit; -- We expect generally positive free cash flow generation on an annual basis though there may be seasonal variability in cash flow; and -- We anticipate only modest growth related capital spending needs. The business is not very working capital intensive and nondiscretionary capital needs are not high. Recovery analysis Please see our recovery report on Taminco Global Acquisition Corp. to be published shortly on RatingsDirect following this report. Outlook The stable outlook reflects our assumption that the company's EBITDA will remain resilient to potential economic downturns, and will grow modestly in 2013. We anticipate positive free cash flow generation. Importantly, we assume management will remain committed to credit quality and exhibit prudence in the use of debt so that credit metrics remain appropriate for the rating. We could lower ratings if acquisitions or shareholder distributions weaken credit metrics. More specifically, we could lower ratings if management actions or unexpected earnings weakness such as a decline in EBITDA margins to levels below 20% or flat to negative revenue growth caused the ratio of total debt-to-EBITDA to increase above 5x without prospects for improvement over the next 12 months. We consider an upgrade to be unlikely at this time especially given the proposed debt funded shareholder distribution. The company's private-equity ownership and our view of its financial policies as aggressive currently constrain ratings. We could reassess and raise ratings if the company goes ahead with its planned public offering of shares and uses proceeds to lower debt levels in a sustainable manner. 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 -- Corporate Ratings Criteria 2008, April 15, 2008 Ratings List Ratings Affirmed Taminco Global Chemical Corporation Corporate Credit Rating B+/Stable/-- Taminco Global Chemical Corporation Senior Secured BB- Recovery Rating 2 Senior Secured B- Recovery Rating 6 New Rating Taminco Acquisition Corp. Senior Unsecured US$250 mil PIK toggle nts due 2017 B- Recovery Rating 6 Temporary Contact Information: Paul Kurias (917 880 4230) 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.