Ratings

Oxbow Carbon & Minerals LLC, a subsidiary, is currently the leader in the global petroleum coke market. With the acquisition of GLC, OCMH will expand its presence in the calcined petroleum coke market. These commodity products are primary inputs in industrial production. Standard & Poor's default scenario assumes a modest decline in industrial activity that affects sales growth beginning in 2007; increased competition from new producers of petroleum coke and calcined coke products, resulting in lower margins and customer loss in 2010; and rising interest rates throughout this period. This scenario results in an OCMH bankruptcy in 2010.

• Revenue increases 5% in fiscal year 2007 on a pro forma year-over-year basis, followed by a 3% increase in fiscal 2008, a 1% increase in 2009, and a 5% decline in fiscal 2010;
• Costs of goods sold increases by 100 bps per annum through 2009 and 130 bps in 2010;
• Selling, general, and administrative expense improves 10 bps in 2007 and then increases by 30 bps in 2010;
• CAPEX declines to $20 million in fiscal 2010;
• LIBOR increases 150 bps from fiscal 2007 to fiscal 2010;
• Cost of capital increases of 150 bps on the revolving credit facility only because of the borrower's declining performance;
• Revolving facility availability to fund cash flow shortfalls is limited by the borrower's letter of credit requirement that increase to $85 million in fiscal 2010 from $70 million in fiscal 2007, while deteriorating fundamentals preclude the permitted expansion of the revolving credit facility; and
• The acquisitions are assumed to be completed mid-2007 and the GLC notes previously outstanding are assumed to share pro rata in the collateral package if not refunded under the delayed take-down Term Loan B facility.

Our simulated default scenario results in the following:

• A payment default in fiscal 2010;
• Revenue drops to $3.17 billion in fiscal 2010, 3.8% above pro forma combined fiscal 2006 actual revenue of $3.06 billion;
• EBITDA declines to $89 million in fiscal 2010, 59% below pro forma combined fiscal 2006 EBITDA of $216 million; and
• EBITDA margins decline 430 bps to 2.8% in fiscal 2010 versus 7.1% pro forma combined fiscal 2006.

Standard & Poor's believes that if the borrower were to experience a payment default, it would continue to have a viable business model driven by continued demand for its coal, pet coke, and calcined coke products. Therefore, we believe that lenders would achieve greatest recovery value through reorganization of the borrower rather than through liquidation.

Furthermore, considering the commodity nature of the business and its exposure to macroeconomic factors, emergence from bankruptcy would involve a valuation based on projected cash flow as the borrower emerges and attendant volume and pricing levels improve. Therefore, we based the borrower's valuation on its free cash flow in fiscal 2011, the year following default. Revenue in 2011 is assumed to grow a modest 2% and costs of goods as a percentage of sales improve to 91.7%. Capital expenditure reverts to management's forecast. These assumptions yield emergence EBITDA of $129 million and un-levered cash flow (defined as EBITDA less capital expenditure and working capital changes) of $87 million. Additional components of our valuation are:

• Perpetual growth rate of 1%;
• Weighted average cost of capital of approximately 11.1% assuming a reorganized company financed with 70% debt and 30% equity at the tax adjusted cost of debt of 6.8%;
• Unleveraged beta of 1.43 based on Ibbotson's beta data for this sector; and
• Administrative expenses of approximately 5% of enterprise value representing professional fees and costs of bankruptcy that may be outstanding at the time of recovery.

These discounted cash flow assumptions yield enterprise value of approximately $865 million, which equates to a multiple of 6.7x simulated emergence EBITDA of $129 million. This is comparable with recent transaction multiples in this sector. At default, we project that there would be approximately $1.05 billion of senior secured bank debt outstanding. This assumes a fully drawn revolving credit facility, including the projected amount of peak revolving facility borrowings. After deducting about $43 million of administrative expenses, remaining enterprise value totals $822 million; however, because of the foreign stock pledge exclusion, $58 million of value must be shared with other unsecured senior lenders. Therefore, we estimate 50% to 80% recovery on the new senior secured credit facilities, which equates to a recovery rating of '3' and a bank loan rating of 'B+', equivalent to the corporate credit rating.

Table 3
Transaction Summary	Senior secured facilities
Borrower	Oxbow Carbon and Minerals Holdings LLC
Guarantors	All domestic and foreign direct and indirect subsidiaries
Structure	For the term loan 1% annually, balance due at maturity.
Security package	Secured by a perfected first-priority security interest in substantially all the borrower's and each guarantor's tangible and intangible assets, including the capital stock of the borrower and each of its direct and indirect domestic subsidiaries and 65% of the capital stock of foreign subsidiaries. Collateral may exclude certain assets of Great Lakes Carbon USA that cannot be pledged without the consent of one or more third parties.
Legal jurisdiction/issues	State of New York
Key Covenants	None