Hexion 2020 refi hinges on robust sale multiples, elusive growth

Hexion’s ability to shimmy through a USD 2.44bn maturity wall in 2020 will depend on achieving both high-multiple asset sales and an elusive turnaround of its underlying operations, according to five buyside analysts tracking the company.

And as the nearly 10x-levered diversified chemical producer prepares to report 1Q18 earnings on Monday, investors are looking for any details regarding potentially delevering asset sales, and will be watching for signals about refinancing prospects embedded in the company’s earnings performance, the sources continued.

Judging by trading levels for Hexion’s USD 574m 9% second lien notes due in 2020, the market is not baking in an undeniable refinancing. The notes changed hands yesterday at 82 to yield 18.28%, according to MarketAxess.

For their part, the company’s first lien bonds due in 2020 – a USD 1.55bn 6.625% note and a USD 315m 10% note – trade closer to par, at prices of 95 and 100.375 and yields of 9.535% and 9.552%, respectively.

But the borrower still has some levers to pull, namely in the form of prospective asset sales that will need to be executed at double digit multiples and whose proceeds will likely be allocated to paydowns of first and second lien debt, the sources said.

“It’s hard to have a lot of conviction with specific scenarios because it’s an Apollo company,” said one of the analysts. “But I think they’ll try to sell some of the businesses on forward-looking, improved performance and chip away at the 2020 maturities.”

“And then they’ll grow EBITDA at the remaining businesses as a bridge to a refi,” the source added.

Multiple plans

Hexion in February engaged Credit Suisse and Barclays to review strategic alternatives, including a sale of a portion or all of the business. In filings, the company said it initiated a process to specifically sell a portion of its epoxy, phenolic and coatings resins segment. And investors have zeroed in on both Hexion’s phenolics as well as its Versatic and forest products businesses as the most likely sale candidates, the sources said.

As an example, the Versatic Acids business – which adds adhesion and stability properties to finished coatings – generates approximately USD 60m of EBITDA, and could fetch a multiple in the low double digits, bringing in at least USD 600m of proceeds, two of the analysts said.

Investors were encouraged by the roughly 12x multiple garnered by Hexion when it sold its ATG business in January, taking it as a sign it could achieve similar multiples on other, possibly larger portions of the epoxy, phenolic, and coatings segment, the sources said.

Divestiture proceeds could pay down first lien debt, which makes up a larger portion of the 2020 maturities. But proceeds could be used more effectively to buy back the 9% second lien notes at a discount, two of the analysts said. Hexion, as such, could contemplate using investment baskets to more aggressively address the second lien maturity. For example, the company could consider using an unrestricted subsidiary as an intermediary entity to potentially circumvent first lien prepayment requirements, they added.

In many ways, the refi playbook follows a plan executed previously by Hexion. Leading up to a 2018 maturity wall, the borrower used cash and asset sales to cut maturities down to a manageable size by repurchasing bonds at a discount, and then launched a successful – but expensive – refinancing.

Ripping epoxies

A maker of an array of chemicals for everything from wind turbines to construction materials, Hexion groups its business into two segments: forest product resins and epoxy, phenolic and coating resins. Its earnings performance has sagged along at trough levels for years, pinned down by epoxy oversupply, the collapsing oil market, and only a slow recovery in U.S. home construction.

Nevertheless, favorable macro trends stemming from Chinese demand for waterborne coatings combined with the uptick in oil prices and new housing starts in the U.S. are expected to provide a boost to Hexion earnings in 2018, the sources said.

It might be just in time.

“Epoxy prices are ripping,” said one of the analysts, referencing double-digit increases depending on the geography for the polymer, used in cars, pipelines, and metal packaging, among other things.

On its earnings call last week, management from Hexion competitor Olin said that liquid epoxy prices increased 21% and 27% in North America and Europe during 1Q18, respectively, followed by an additional bump in April.

Hexion’s base epoxy in intermediates generated USD 107m in EBITDA in 2011, but fell to USD 7m in 2016. Asked on the 4Q17 call whether that 2011 figure is attainable again, CEO Craig Rogerson responded affirmatively, saying they would pass the mid-point to USD 107m during 2018.

Increased housing starts in the US, though below the 40-year average of approximately 1.5m annual starts, “should provide an additional tailwind for us from the operating leverage created by incremental volumes and our ongoing productivity actions,” Rogerson said, with regard to Hexion’s forest products business.

On an LTM basis, Hexion generated USD 424m of adjusted EBITDA. However, roughly USD 182m of that consists of adjustments for restructuring costs and projected savings, leading some investors to give them credit for only roughly USD 370m of EBITDA, the sources said. That pushes leverage to 10x.

Nevertheless, on a consolidated basis, and given the advantageous macroeconomic backdrop, Hexion EBITDA could climb closer to a range of USD 425m – USD 450m in 2018, the sources said, leaving it levered between 8.2x – 8.7x.

For comparison, industry comps Olin and Huntsman trade at equity multiples slightly lower than Hexion’s total leverage. Olin’s current EV multiple is 8.5x, whereas Huntsman’s current EV multiple is 7.7x, for instance.

“Huntsman has the best business because it is the least commoditized, and Olin has the most exposure to commodity prices, so Hexion is somewhere in the middle,” said a third buysider.

“Chemical multiples are high,” said the fourth analyst. “It might not be as complicated as everyone thinks.”

Hexion did not respond to a request for comment. Apollo declined to comment.

2018 Debtwire

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