On April 25, 2007, Standard & Poor's Ratings Services assigned bank loan and recovery ratings to
Millennium Inorganic Chemicals' proposed $880 million senior secured credit facilities, which will consist of a $100 million five-year first-lien revolving credit facility, a $550 million seven-year first-lien term loan, and a $230 million seven-and-a-half year second-lien term loan, based on preliminary terms and conditions.
The first-lien credit facilities, which are summarized in Table 1, are rated 'B+', one notch above the corporate credit rating, with a recovery rating of '1'. These ratings indicate our expectation for full (100%) recovery of principal in a payment default scenario, including the assumption of a fully drawn revolving credit facility. The second-lien term loan is rated 'CCC+', two notches below the corporate credit rating, with a recovery rating of '5', indicating our expectation for a negligible (0%-25%) recovery of principal in the event of a payment default.
Proceeds of $780 million from the term loans and about $350 million in equity contribution will be used to fund the acquisition of Millennium by The National Titanium Dioxide Co. Ltd. (Cristal) and buy a $40 million Brazilian minority interest.
(For the complete corporate credit rating rationale on Millennium, see Standard & Poor's
research update published earlier today.)
Table 1
Millennium Inorganic Chemicals--Credit Profile
Corporate credit rating
B/Stable/--
Facility/Issue
Issue Rating
Recovery Rating
Recovery
Term (years)
Repayment
$100 million senior secured revolving credit facility
B+
1
80%-100%
5
Bullet
$550 million senior secured first-lien term loan
B+
1
80%-100%
7
1% per year, quarterly, balance payable in four quarterly installments in final year
$230 million senior secured second-lien term loan
CCC+
5
0%-25%
7.5
Bullet
A summary of the loan terms and conditions is provided in Table 2 at the end of this report. Important structural considerations include:
All of the consolidated non-U.S. operations of the company are not subsidiaries of the U.S. borrower, but rather its U.K. parent company (UKN). As such, we understand that there are no adverse tax consequences (related to U.S. Internal Revenue Code section 956) that restrict the ability of the non-U.S. entities to provide guarantees, asset pledges, or that limit the pledge of subsidiary stock to 65%.
We understand that the security and guarantee arrangements from the English and Australian entities will be effective and enforceable, but expect that these arrangements will increase the legal and administrative expenses following default as described in the Results section below. These entities generate nearly two thirds of consolidated EBITDA. We have not made any estimation for the time required to realize on the value provided by these agreements.
As a result of restrictions under local law, UKN's French and Brazilian subsidiaries, which generate roughly 11% and 7% of consolidated EBITDA, respectively, will not be guarantors and thus will not directly pledge their assets to support the transaction. However, the Brazilian subsidiaries may become guarantors and pledge all of their assets if the company is successful in purchasing the 28% ownership interest in the Brazilian subsidiary that is currently held by public shareholders.
The value stemming from the non-guarantor French and Brazilian operations will still indirectly support the credit facilities because the entities that ultimately own these operations will be guarantors and will pledge 100% of their ownership of these entities to the secured lenders. However, the claim on the value of the non-guarantor subsidiaries will be structurally subordinate to debt and other liabilities at these entities. There is currently $16 million in debt held at these subsidiaries.
The loan agreements are expected to restrict the company's ability to add additional debt or pledge liens to other creditors to $30 million each, which will help limit the potential dilution of recovery value of the proposed lenders from subsequent transactions.
The bank facilities are expected to include an uncommitted option to increase the size of the first-lien term loan by $100 million subject to certain conditions including additional lender commitments and pro forma covenant compliance. Our recovery analysis does not anticipate this option being exercised, and our secured debt and recovery ratings would be subject to reevaluation if it is.
Recovery Analysis
Simulated default scenario
Our simulated default scenario assumes a downturn in the global industrial economy, with a steeper downturn assumed in the titanium dioxide (TiO2) market. In this scenario, we would expect sales volumes to deteriorate and pricing pressure from increased competition to depress gross margins. In addition, our default scenario includes a 200-basis-point rise in the LIBOR rate and a 100-basis-point increase in the revolving credit facility interest margin as credit terms are renegotiated due to the assumed credit deterioration. Based on these assumptions and the company's pro forma capital structure, we anticipate the company would default with EBITDA of $150 million, which is slightly below pro forma 2007 levels. However, we note that these levels are depressed because of higher raw material and utility costs as well as production problems at a plant in the U.K. At this point, we estimate that EBITDA would no longer cover elevated interest expense and minimum maintenance capital spending of approximately $42 million. This level of capital spending would include items without which the company would be unable to operate or would severely damage the business.
We note that our simulated default scenario does not anticipate any impact from the lead paint-related litigation liabilities because:
These liabilities relate solely to the Millennium Holdings Inc. entity, which is not being acquired as part of the transaction and will remain a wholly owned subsidiary of Lyondell Chemical Co. (BB-/Stable/B-1).
Millennium Inorganic Chemicals has received full indemnity from the seller, Millennium Chemicals Inc., for the potential Rhode Island lead litigation liabilities.
Valuation
We believe that in the event of a default, Millennium would continue to operate as part of a reorganized entity because of the company's solid business position as the No. 2 producer of TiO2 in the world. Despite the softness expected in the TiO2 market in the default scenario, we would expect the industry to continue to have relatively favorable long-term supply and demand fundamentals and reasonable growth prospects associated with the recovery of key end markets. As a result, we applied our enterprise-value methodology in assessing recovery prospects. We are assuming an emergence multiple of 5x default EBITDA and an enterprise value of about $748 million. We note that this multiple is somewhat below the 6.4x purchase multiple for the transaction, reflecting the more adverse operating environment anticipated in our simulated default scenario.
Results
Our analysis assumes that administrative expenses and other legal costs would be higher than typical if the company defaults. This is because the borrower would be expected to file bankruptcy in the U.S. but lenders would also need to initiate legal claims in other jurisdictions to realize on the value of the non-U.S. entities that are not subsidiaries of the borrower (directly or indirectly) and thus not likely to be pulled into or stayed by a U.S. bankruptcy proceeding. As such, we have reduced our gross enterprise value by 8% to $688 million to approximate the value available to be distributed to creditors. We estimate that about half of this value would be derived from the U.S. operations, providing the first-lien bank facility lenders with roughly 53% of their total coverage at default. This assumes a fully drawn revolving facility.
To realize additional value, the lenders would likely next look to the value provided by the U.K. and Australian subsidiaries that are expected to guarantee the loans and fully pledge their assets as collateral. These entities are estimated to represent almost one-third of the net enterprise value, which would boost the first-lien lender's recovery of principal by about 34% to a total of 87%. Of the remaining value, related to the French and Brazilian non-guarantor subsidiaries, roughly $110 million would be expected to be available to the lenders after accounting for the 28% of the Brazilian subsidiary that is owned by other investors. Our analysis assumes that the lenders will be able to realize on this value by pursuing the U.K. guarantors and collateral since these entities own the stock of the non-guarantor entities. This would avoid the additional costs and complications of pursuing this value through the French or Brazilian legal systems. Adding this to recovery value would further increase the principal recovery for the first-lien lenders to roughly 104%, resulting in a '1' recovery rating, indicating a full recovery of principal of 100%. Based on this analysis, there would be a minimal level of remaining value for the second-lien lenders, resulting in a '5' recovery rating, indicating a negligible recovery of principal of 0% to 25%.
Transaction Summary
Table 2
Transaction Summary
Borrower
Millennium Inorganic Chemicals, a newly formed Delaware limited liability company.
Guarantors
A newly formed English private limited company, which is the borrower's immediate parent company, and the subsidiary guarantors of the English parent company in the U.K. and Australia.
Structure
$880 million senior secured credit facilities, consisting of a $100 million revolving credit facility ,a $550 million first-lien term loan, and a $230 million second-lien term loan.
Security package
A perfected first-priority lien on all tangible and intangible assets for the first-lien facilities of the subsidiaries in the U.S., U.K. and Australia, and 100% of the capital stock of the borrowers and guarantors, including the capital stock of the subsidiaries in France and a portion of the capital stock of the subsidiaries in Brazil. A perfected second-priority lien on all of the collateral securing the first-lien credit facilities for the second-lien term facility.
Legal jurisdiction/issues
Governed by the law of the state of New York.
Key covenants
Revolving credit facility and first-lien term loan: minimum interest coverage, maximum total leverage, and first-lien leverage. Second-lien term loan: minimum interest coverage and maximum total leverage. Any cash investment in the form of common equity made by the parent company directly will be included in the calculation of EBITDA.
Other key provisions
An uncommitted $100 million incremental term loan facility, pari passu with funded term loan. Pricing will not exceed that of the funded loan by more than .50%.
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