Moody's Places Kraton (KRA) on Review for Downgrade Amid Move to Acquire Arizona Chemical

Moody's Investors Service placed Kraton Performance Polymers, Inc. (NYSE: KRA) Ba3 corporate family rating under review for downgrade. The review was prompted by the company's announcement that it has entered into a definitive agreement to acquire Arizona Chemical Holdings Corporation (Arizona Chemical, Ba3, rating under review for downgrade) in a transaction valued at approximately $1.37 billion. The company has proposed a capital structure of $1.775 billion in new debt issuance, which would refinance the outstanding debt at both entities. Additionally, Kraton's $250 million ABL revolving credit facility would be replaced with a new $250 million ABL facility. Kraton's Speculative Grade Liquidity rating is affirmed at SGL-2. The acquisition is subject to regulatory approvals and is expected to close by the end of 2015 or beginning of 2016.

The following summarizes today's rating actions:

Kraton Performance Polymers, Inc.

..Corporate Family Rating, -- Under Review for Downgrade, currently Ba3

..Probability of Default Rating -- Under Review for Downgrade, currently Ba3-PD

..Speculative Grade Liquidity Rating -- Affirmed SGL-2

Kraton Polymers LLC

....Gtd. Senior Unsecured Notes due 2019 , Under Review for Downgrade, currently B1, LGD4 (Kraton Polymers Capital Corporation is a co-issuer of the notes)

....Outlook changed to Under Review for Downgrade from Stable

RATINGS RATIONALE

The review for downgrade reflects the expected increase in Kraton's leverage following the acquisition of Arizona Chemical due to the significant increase in debt. Kraton estimates that the Arizona Chemical transaction value represents an adjusted 7.4x multiple for the LTM ending June 30, 2015, or 5.5x including synergies. The deal announcement includes expectations for a capital structure refinancing, which will result in $1.775 billion of total balance sheet debt upon completion of the transaction. The proposed capital structure is in the form of a $1.35 billion covenant-lite term loan, $425 million senior unsecured notes, and a new $250 million ABL revolving facility, however the final capital structure may ultimately differ. Should the acquisition be fully debt financed as indicated, it could result in pro forma leverage near 7.0x, for LTM June 30, 2015, or 5.6x with synergies of approximately $65 million. (Ratios include Moody's Standard Adjustments estimated for the transaction.)

The review will focus on the final capital structure, leverage following the transaction, as well as the expected improvement in both Kraton and Arizona Chemical's performance in the second half of 2015, which could improve pro forma LTM leverage by over a turn to 5.8x, or 4.8x including synergies. Additionally, the review will consider the company's combined free cash flow generation capabilities, the anticipated synergies, benefits from the NOL tax shield, its plans for debt reduction, and management's ultimate financial philosophy as it pertains to its leverage metric target. The acquisition of Arizona Chemical will carry normal business integration risks.

The company has secured $1.37 billion in committed financing from Credit Suisse Securities (USA) LLC, Nomura Securities International, Inc., and Deutsche Bank Securities, Inc.

The principal methodology used in this rating was Global Chemical Industry Rating Methodology published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Arizona Chemical Holdings Corporation (Arizona Chemical), headquartered in Jacksonville, Florida, is a global leader in the production and sales of pine based specialty chemicals. Arizona Chemical was acquired by private equity sponsor American Securities LLC in 2010, from private equity owner Rhône Capital LLC, who retained a minority interest. The initial owner, International Paper (Baa3), also retains a minority interest and provides key feedstock supply contracts with Arizona Chemical. The company had sales of $863 million for the LTM ending June 30, 2015.

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