Moody's Places Chemtura (CHMT) Ratings on Review for Upgrade
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Moody's Investors Service placed Chemtura Corporation's (NYSE: CHMT) Ba3 Corporate Family Rating (CFR), Ba3-PD probability of default rating and B1 senior unsecured guaranteed notes rating on review for upgrade.
This action follows the announcement that Chemtura has agreed to be acquired by Lanxess AG (Baa3, Stable) for a total consideration of $2.5 billion, or 10x EBIDTA on a pre-synergy basis.
The transaction has been approved by each of Chemtura's and Lanxess's boards of directors, but is still subject to Chemtura shareholders' approval, receipt of necessary antitrust and other regulatory approvals and customary conditions and provisions; pending approvals, the companies expect to complete the transaction around mid-2017.
..Issuer: Chemtura Corporation
On Review for Upgrade:
.... Probability of Default Rating, Placed on Review for Upgrade, currently Ba3-PD
.... Corporate Family Rating, Placed on Review for Upgrade, currently Ba3
....Senior Unsecured Regular Bond/Debenture due 2021, Placed on Review for Upgrade, currently B1 (LGD5)
.... Speculative Grade Liquidity Rating, Unchanged at SGL-2
....Outlook, Changed To Rating Under Review From Stable
The review for upgrade follows the announcement that Chemtura has agreed to be acquired by Lanxess for $33.5 per share in an all cash transaction valuing Chemtura at an enterprise value $2.5 billion, or 10x 2016E EBITDA pre synergy basis, and represents a premium of 18.9% over the September 23, 2016 share price.
The acquisition is to be financed initially with a EUR2.0 billion bridge loan which will later be refinanced with a mix of debt, hybrid equity securities and balance sheet cash. Moody's London office, which is responsible for the ratings of Lanxess, earlier today affirmed Lanxess's ratings at Baa3, stable, and said the transaction is in line with Lanxess's strategic plan to strengthen its specialty chemicals portfolio and enhance the resilience and quality of its earnings; and the transaction will boost Lanxess's presence in North America and Asia. Moody's London also said the combined companies should benefit from targeted synergies of around EUR100 million by 2020, to be achieved through a combination of cost reduction, including production, sales and SG&A optimization.
The review will focus on the extent to which Lanxess assumes or provides a guarantee on the notes of Chemtura. In the event Lanxess guarantees or defeases these notes, the notes will be rated equivalent to Lanxess's senior unsecured Baa3 rating. However, if Lanxess decides not to provide support for Chemtura's notes and Chemtura does not continue to issue financial statements, Moody's could position Chemtura's rating one or more notches below Lanxess's senior unsecured rating. Under that scenario, Moody's would subsequently withdraw the ratings on Chemtura's notes due to lack of sufficient financial information.
The outlook of Lanxess's Baa3 rating is stable and anticipates the company achieving credit metrics in line with the Baa3 rating within a year after closing, including total debt to EBITDA around 3.0x and retained cash flow (RCF) to net debt above 20%. It also assumes that the company refinances the EUR2.0 billion bridge facility with no less than EUR500 million in hybrid equity issuance.
Lanxess's rating could be upgraded following the successful completion of Phase 2 of the realignment and efficiency program in parallel with a successful integration of Chemtura evidenced by an EBITDA margin rising into the mid-teens and sustained strengthening in financial metrics including RCF to total debt in the mid-20s. Lanxess's ratings could be downgraded following a failure to sustain the ongoing recovery in operating profitability and/or an inability to refinance the acquisition bridge financing leading to a reversal of recent strengthening in financial metrics (aside from potential near-term volatility in the pension adjustment), including total debt to EBITDA rising towards 4x and retained cash flow (RCF) to net debt falling below 20%.
The principal methodology used in these ratings was Global Chemical Industry Rating Methodology published in December 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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