Momentive Performance bonds sink on restructuring fears

Tue Mar 4, 2014 5:06pm EST

NEW YORK, March 4 (IFR) - Bonds from Momentive Performance Materials have slid 65% in a matter of weeks, raising fears of a debt restructuring and dashing hopes private-equity owner Apollo will step in to help.

The chemical maker's 11.5% subordinated high-yield 2016 bonds are trading at just 28% of face value, after starting the year around 70 cents and pushing up to 82 cents in late January.

Two market sources told IFR the slide was triggered by the appointment of Blackstone as advisors to the subordinated bondholders, which has many speculating about a restructuring.

"A few months ago, it looked like the consensus view was that Apollo would offer some kind of exchange on the subordinated bonds in the mid 70s," said Jon Brager, a high-yield analyst at Hermes Credit, which did not own the bonds.

"The sharp move suggests that investors now believe the value breaks lower down in the capital structure, and that those bonds could be taken out more in the 20/30 cents range."

Apollo, Blackstone and Momentive Performance all declined to comment.

Ratings agency S&P last month lowered its ratings on the bonds one notch to CCC-, saying the prospects of staving off a default were dim.

It said the company will struggle to comply with the maximum senior secured leverage covenant of 5.25x in its USD75m cash flow revolver that matures in December 2014.

TOUGH SECTOR

Apollo had hoped to cash out five years after buying Momentive Performance from General Electric in 2006 for USD3.8bn.

It filed to undertake an USD862m IPO in April 2011, but the listing never materialized and was withdrawn in August 2012.

Since then, Momentive Performance's earnings have plummeted. Its last 12 months of earnings before interest, tax, depreciation and amortization (EBITDA) was USD236m, compared to USD3.2bn of gross debt, according to Brager.

That puts leverage at a staggering 13.6 multiple to earnings. S&P puts the adjusted debt-to-EBITDA ratio even higher at above 15 times.

BAD TO WORSE

Investors may have been hoping that Apollo would support Momentive Performance's business and provide the cash it badly needs - particularly after the firm took advantage of the red-hot capital markets to cash out of other investments.

But while Momentive's second-lien bonds - the 9% USD1.1bn issue maturing in 2021 - are trading at around 85 cents, the 2016s continue their downward spiral.

"There's a lot of confusion about what will happen to these bonds," said another high-yield investor, noting the rapid decline shows the perils investors now face.

"When things go bad at a company, there really is not as much market-making as there used to be, which at least gave high-yield investors a chance to get out."

Some investors bet that a stabilization in third-quarter EBITDA could help it survive longer without a restructuring, but that no longer seems to be the case.

Hermes Credit's Brager said that, according to the third quarter results, Apollo owned around 48% of the second-lien bonds and about a third of the sub 2016s.

"Everyone in the market thought that this was a busted capital structure, but then market conditions became very hot," he said.

"However, when several large holders of the subordinated bonds hired advisors, a lot of forced sellers emerged."

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