Hexion Inc.
Hexion 1L Notes Hear FA Pitches as Company Faces More Than $2B in 2020 Maturities
Mon 11/05/2018 16:48 PM
A group of holders of Hexion’s 2020 and 2022 first lien bonds working with Akin Gump as legal counsel has today heard financial advisor pitches, according to sources. This comes as bondholders across the cap stack organize and the company faces north of $2 billion in 2020 maturities. A group of cross-holders is organized with Milbank Tweed and Houlihan Lokey, according to sources; that group’s holdings predominantly include the company’s second lien and unsecured debt, which comprises two series of debentures originally issued by Borden.
Hexion had previously been considering a sale of its versatic acid business, part of its epoxy, phenolic and coatings resins segment, to generate liquidity. Current market conditions and valuations , however, now make this option unlikely, sources told Reorg. In better market conditions, the versatic acid business may have fetched about $500 million in proceeds, the sources add.
Two series of first lien bonds are the first to mature in Hexion’s $3.8 billion cap stack, and the company has yet to provide guidance on refinancing plans ahead of those notes’ April 15, 2020, due date. While first lien and cross-holder groups have formed, the Apollo-owned company has not formally engaged with creditors as of yet, sources tell Reorg.
Hexion faces a coupon payment due Nov. 15 on its 9% second lien notes and has not yet provided a date for its release of third-quarter financials. In fiscal 2017, the company released third-quarter numbers on Nov. 14. Hexion’s capital structure as of the June 30 end of the second quarter is below:
As reported by Reorg Covenants, the company does have unencumbered assets, including both in the United States and internationally. In the U.S., these assets include so-called principal properties that may represent value of $400 million, according to sources. Should Hexion, however, opt to give first lien creditors a lien on those principal properties in an attempt to get a maturity-extending deal done, a negative pledge in the company’s unsecured Borden notes would require those Borden bonds to likewise get a lien on principal properties. Further complicating matters, the Borden bonds, issued under a base indenture from 1987, are noncallable and do not include a make whole provision, according to sources.
Certain international entities are included in the company’s nonguarantor entities as broken out in Hexion’s financials. It appears that the majority of the company’s international entities are held under Hexion International Holdings Cooperatief UA. In 2017, Cooperatief generated $144 million in EBITDA and burned $72 million of cash. Included in Cooperatief’s approximately $1.3 billion of debt is $1.1 billion of intercompany notes owed to Hexion Inc. Those intercompany notes are included as collateral for Hexion’s secured notes.
Reorg Covenants estimates that as of June 30, Hexion can issue about $78 million of additional first lien debt, which would limit the size of any potential exchange that would use new first lien secured debt as currency. Debt capacity includes amounts able to be raised at foreign entities. To increase its secured debt capacity, Hexion would need indenture amendments and depending on the amount of increased capacity, an ABL amendment that would require at least a majority consent under each debt instrument.
The company reported liquidity of $322 million at June 30, which includes $114 million of unrestricted cash, $180 million of ABL availability and $28 million of borrowing capacity at various international subsidiaries. However, because first lien debt capacity effectively limits ABL draws to $78 million, the company’s effective liquidity is $188 million. Hexion generated negative $103 million of free cash flow in the June 30 LTM period.
Asset Sale Process
Included with the company’s fourth-quarter release in March, Hexion announced that it initiated a process to sell a portion of its epoxy, phenolic and coatings resins segment. The company said at that time that sale proceeds would be used to reduce debt. More recently on the company’s second-quarter call on Aug. 7, management noted: “In terms of portfolio optimization efforts, we previously announced that we were pursuing the sale of a portion of our epoxy, phenolic and coating resins segment, and that process is moving forward, although we are not commenting further at this time.”
In its financials, Hexion splits its business into two primary segments: epoxy, phenolic and coating resins and forest products resins. Of the $420 million in LTM EBITDA as of June 30, the epoxy segment contributed $218 million (approximately 52%).
On its second-quarter call, management highlighted the growth in epoxy. According to the company, revenue increased 9% from the prior year driven by a positive price mix of 10% and a favorable currency translation of 5%. Results in the segment were partially offset by volume declines of 6%. The company also highlighted EBITDA growth thata reflected “strong increase in Base Epoxy Resins, improved Specialty Epoxy results supported by continued growth in our waterborne coatings and ongoing improvement in Phenolic Specialty Resins due to higher volumes and cost actions.”
The epoxy business includes facilities in the U.S. and internationally, according to Hexion’s 2017 10-K.
If assets sold are from international entities, Hexion could use sale proceeds to repay the balances owed under intercompany notes. As reported by Reorg Covenants, each series of Hexion’s secured notes permit it to prepay the intercompany notes using asset sale proceeds without having to ratably repay the secured notes. Because Hexion’s debt documents do not currently restrict it from prepaying any outstanding debt with available cash, proceeds from the intercompany loan repayment can likely be used to repay any outstanding debt.
Hexion provided the following organizational structure as of the end of 2015:
Hexion also reports financials for nonguarantor entities. The majority of these nonguarantor entities appear to be held by Hexion International Holdings Cooperatief UA.
In 2017, Hexion International Holdings Cooperatief UA generated revenue of $2.01 billion and EBITDA of $144 million. Total nonguarantor entities as disclosed in the company’s 2017 10-K generated revenue of $2.2 billion. Free cash flow for International Holdings Cooperatief UA was negative $72 million in 2017.
Free cash flow includes $89 million of cash interest, the majority of which was paid to Hexion Inc. as consideration for $1.1 billion of intercompany notes.
Debt at Cooperatief is shown below. The entity includes borrowings under Hexion Inc.’s ABL.
Hexion had previously been considering a sale of its versatic acid business, part of its epoxy, phenolic and coatings resins segment, to generate liquidity. Current market conditions and valuations , however, now make this option unlikely, sources told Reorg. In better market conditions, the versatic acid business may have fetched about $500 million in proceeds, the sources add.
Two series of first lien bonds are the first to mature in Hexion’s $3.8 billion cap stack, and the company has yet to provide guidance on refinancing plans ahead of those notes’ April 15, 2020, due date. While first lien and cross-holder groups have formed, the Apollo-owned company has not formally engaged with creditors as of yet, sources tell Reorg.
Hexion faces a coupon payment due Nov. 15 on its 9% second lien notes and has not yet provided a date for its release of third-quarter financials. In fiscal 2017, the company released third-quarter numbers on Nov. 14. Hexion’s capital structure as of the June 30 end of the second quarter is below:
As reported by Reorg Covenants, the company does have unencumbered assets, including both in the United States and internationally. In the U.S., these assets include so-called principal properties that may represent value of $400 million, according to sources. Should Hexion, however, opt to give first lien creditors a lien on those principal properties in an attempt to get a maturity-extending deal done, a negative pledge in the company’s unsecured Borden notes would require those Borden bonds to likewise get a lien on principal properties. Further complicating matters, the Borden bonds, issued under a base indenture from 1987, are noncallable and do not include a make whole provision, according to sources.
Certain international entities are included in the company’s nonguarantor entities as broken out in Hexion’s financials. It appears that the majority of the company’s international entities are held under Hexion International Holdings Cooperatief UA. In 2017, Cooperatief generated $144 million in EBITDA and burned $72 million of cash. Included in Cooperatief’s approximately $1.3 billion of debt is $1.1 billion of intercompany notes owed to Hexion Inc. Those intercompany notes are included as collateral for Hexion’s secured notes.
Reorg Covenants estimates that as of June 30, Hexion can issue about $78 million of additional first lien debt, which would limit the size of any potential exchange that would use new first lien secured debt as currency. Debt capacity includes amounts able to be raised at foreign entities. To increase its secured debt capacity, Hexion would need indenture amendments and depending on the amount of increased capacity, an ABL amendment that would require at least a majority consent under each debt instrument.
The company reported liquidity of $322 million at June 30, which includes $114 million of unrestricted cash, $180 million of ABL availability and $28 million of borrowing capacity at various international subsidiaries. However, because first lien debt capacity effectively limits ABL draws to $78 million, the company’s effective liquidity is $188 million. Hexion generated negative $103 million of free cash flow in the June 30 LTM period.
Asset Sale Process
Included with the company’s fourth-quarter release in March, Hexion announced that it initiated a process to sell a portion of its epoxy, phenolic and coatings resins segment. The company said at that time that sale proceeds would be used to reduce debt. More recently on the company’s second-quarter call on Aug. 7, management noted: “In terms of portfolio optimization efforts, we previously announced that we were pursuing the sale of a portion of our epoxy, phenolic and coating resins segment, and that process is moving forward, although we are not commenting further at this time.”
In its financials, Hexion splits its business into two primary segments: epoxy, phenolic and coating resins and forest products resins. Of the $420 million in LTM EBITDA as of June 30, the epoxy segment contributed $218 million (approximately 52%).
On its second-quarter call, management highlighted the growth in epoxy. According to the company, revenue increased 9% from the prior year driven by a positive price mix of 10% and a favorable currency translation of 5%. Results in the segment were partially offset by volume declines of 6%. The company also highlighted EBITDA growth thata reflected “strong increase in Base Epoxy Resins, improved Specialty Epoxy results supported by continued growth in our waterborne coatings and ongoing improvement in Phenolic Specialty Resins due to higher volumes and cost actions.”
The epoxy business includes facilities in the U.S. and internationally, according to Hexion’s 2017 10-K.
If assets sold are from international entities, Hexion could use sale proceeds to repay the balances owed under intercompany notes. As reported by Reorg Covenants, each series of Hexion’s secured notes permit it to prepay the intercompany notes using asset sale proceeds without having to ratably repay the secured notes. Because Hexion’s debt documents do not currently restrict it from prepaying any outstanding debt with available cash, proceeds from the intercompany loan repayment can likely be used to repay any outstanding debt.
Hexion provided the following organizational structure as of the end of 2015:
Hexion also reports financials for nonguarantor entities. The majority of these nonguarantor entities appear to be held by Hexion International Holdings Cooperatief UA.
In 2017, Hexion International Holdings Cooperatief UA generated revenue of $2.01 billion and EBITDA of $144 million. Total nonguarantor entities as disclosed in the company’s 2017 10-K generated revenue of $2.2 billion. Free cash flow for International Holdings Cooperatief UA was negative $72 million in 2017.
Free cash flow includes $89 million of cash interest, the majority of which was paid to Hexion Inc. as consideration for $1.1 billion of intercompany notes.
Debt at Cooperatief is shown below. The entity includes borrowings under Hexion Inc.’s ABL.
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