Ratings Agency Grows Warier Yet With Hexion

Standard & Poor’s shaky confidence in Apollo Management’s chemical concern Hexion Specialty Chemicals has been damaged even further, prompting the ratings agency to lower its already low-grade corporate credit rating on the Columbus, Ohio-based company to ‘B-‘ from ‘B.’

The downgrade comes after Hexion Specialty Chemicals hit its latest hurdle in the protracted 16-month battle to acquire chemical manufacturer Huntsman Corp. In late October, banks Credit Suisse and Deutsche Bank said they would not extend the length of their credit agreement to finance the deal beyond the Nov. 1 expiration date. A New York State judge recently sided with the lenders.

Making matters worse for Apollo Management is the double impact of the credit crisis and the fact that the firm is under a separate order by the Delaware court system to do everything in its power to close on the acquisition of Huntsman. “The downgrade reflects Hexion’s weak financial performance relative [to] our expectations for the rating, increased litigation risk, and our growing concerns about the company’s operational performance in an economic downturn,” wrote Standard & Poor’s credit analyst Paul Kurias in a report.

If the transaction is not completed, Hexion Specialty Chemicals could be liable for at least a break-up fee of $325 million, an obligation it may find difficult to shoulder. “Given Hexion’s already stretched financial profile, we would view the potential addition of any debt related to the transaction’s $325 million break-up fee that could be payable to Huntsman as burdensome,” Kurias said.

Litigation risk is on the rise, according to S&P, because the banks’ denial of an extension to the financing commitment diminishes the prospect of obtaining funding for the merger. If the deal stalls completely, Hexion Specialty Chemicals would be vulnerable to additional damage claims by Huntsman. S&P has been wary of the Huntsman deal from the start and it left all of its ratings on Hexion Specialty Chemicals on CreditWatch with negative implications, where they were placed shortly after the proposed combination was announced. It’s keeping its ratings on Huntsman on CreditWatch with negative implications as well.

Apollo Management formed Hexion Specialty Chemicals in June 2005 through the combination of three chemical companies; Borden Chemical Inc., Resolution Performance Products LLC and Resolution Specialty Materials LLC. Upon completion of the three-way merger, the combined company had pro forma 2004 annual net sales of $4.1 billion. The intent was to take the company public via an IPO, but plans were eventually shelved in June 2006 due to adverse market conditions.

For the second quarter ended June 30, 2008, Hexion Specialty Chemicals, whose products include resins, waxes and coatings, reported net sales of $1.67 billion, up from $1.46 billion for the same period in 2007. However, the company reported a widening net loss of $180 million in the quarter, compared to a net loss of $4 million in the equivalent 2007 period. It reported total assets of $3.97 billion and total liabilities of $5.47 billion.

Hexion originally entered into the agreement to acquire Huntsman in July 2007. The agreed-upon price was set at $28 per Huntsman share, plus the assumption of the company’s debt, putting the total price tag at about $10.6 billion. At the time, Hexion Specialty Chemicals was competing with rival bidder and chemicals competitor Bassell, a Netherlands-based company whose final bid for Huntsman was $25.25 per share.

Salt Lake City-based Huntsman makes and markets chemicals used in industry sectors like aviation, construction and technology. At press time, its shares, which trade under ticker symbol ‘HUN’ on the New York Stock Exchange, were trading under $9, nearly 70 percent below the $28 agreed-to acquisition price. According to its third-quarter report, which was filed Nov. 6, Huntsman generated net income of $10.8 million on $8.2 billion of total revenues for the first nine months of 2008, compared to a net loss of $174.3 million on $7.1 billion for the same period the year before.

Hexion Specialty Chemicals and Huntsman reportedly are discussing amending the price of the acquisition to reflect the new financing challenges, but a New York Times story suggests that Huntsman may not be willing to consider anything below the year-and-a-half old Bassell offer of $25.25 a share. Bassell has since merged with Lynondell Chemicals.