Hexion Holdings LLC – Files Chapter 11 as $2.5bn Debt Wall Looms, Announces Restructuring Support Agreement with Noteholders, Details DIP and Exit Financing Facilities

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April 1, 2019 – Hexion Holdings LLC and 17 affiliated Debtors (f/k/a Momentive Specialty Chemicals and Borden Chemicals; and now together “Hexion” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-10684. The Company, a global leader in thermoset resins, is represented by Michael J. Merchant of Richards, Layton & Finger. Further board-authorized engagements include (i) Latham & Watkins as counsel, (ii) Moelis & Company LLC as financial advisor, (iii) AlixPartners, LLP, as restructuring advisor and (iv) Omni Management Group as claims agent. Hexion is controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its subsidiaries, “Apollo”).

The Company’s petition notes between 1,000 and 5,000 creditors; estimated assets between $1bn and $10bn; and estimated liabilities between $1bn and $10bn. Documents filed with the Court list the Company's largest unsecured creditors as (i) Wilmington Trust, National Association (as trustee for $560.0mn 10.375% First- Priority Senior Notes due 2022), (ii) Wilmington Trust, National Association (as trustee for $315.0mn 10.000% First-Priority Senior Secured Notes due 2020), (iii) Wilmington Trust, National Association (as trustee for $1.55.0bn 6.625% First-Priority Senior Secured Notes due 2020) (iv) Wilmington Trust, National Association (as trustee for $225.0mn 13.75% Senior Secured Notes due 2022), (v) Wilmington Trust, National Association (as trustee for $574.0mn 9.00% Second-Priority Senior Secured Notes due 2020), (vi) BnyMellon Corporate Trust (as trustee for $74.0mn 9.2% Borden Debentures due 2021) and (vii) BnyMellon Corporate Trust (as trustee for $189.0mn 7.875% Borden Debentures due 2023).

In a press release announcing the filing, Hexion advised that it had entered “entered into a Restructuring Support Agreement (‘RSA’) with the vast majority of holders of each of the Company’s notes issuances, representing consensus across its capital structure, on the terms of a consensual financial de-leveraging plan (the “Plan”) that will strengthen the Company’s financial position and accelerate future growth.”

The press release continues, “Under the RSA, creditors representing all tranches of the Company’s notes have agreed to support, and the Company has agreed to pursue, confirmation of the Plan. The RSA contemplates that the Plan will provide for, among other things: (1) significant de-leveraging of the Company’s capital structure by over $2.0 billion, (2) an infusion of $300 million in equity capital through a fully-backstopped rights offering, (3) a committed exit facility of over $1.6 billion, and (4) payment in full of the Company’s trade creditors, employees, and other general unsecured creditors.”

Overview of the Restructuring

A term sheet attached to the restructuring support agreement (the "RSA") provides the following overview: "Hexion Inc. and certain of its affiliates (collectively, the 'Debtors') will restructure their funded debt obligations with the proceeds of a new, $1.641 billion Exit Facility and a $300 million common equity Rights Offering available to holders of Notes Claims, in each case backstopped by certain holders of Notes Claims that have executed the Restructuring Support Agreement, as well as with a new Exit ABL Facility and through the issuance of new common equity in exchange for all outstanding Notes Claims, in each case as set forth in this Term Sheet, the Restructuring Support Agreement and the exhibits and schedules annexed thereto. The Debtors’ creditors and equityholders will receive the following treatment:

  • holders of the Debtors’ 1L Notes will receive $1.45 billion in cash (less adequate protection payments reflecting interest on the 1L Notes paid during the Chapter 11 Cases), 72.5% of the New Hexion Common Shares (subject to dilution for the Rights Offering Shares, the equity issued pursuant to the MIP and any equity issued pursuant to the Equity Backstop Premium and the Debt Backstop Premium (collectively, the 'Agreed Dilution')), and 72.5% of the Rights in the Rights Offering;
  • holders of the Debtors’ 1.5L Notes, 2L Notes, and Unsecured Notes will receive 27.5% of the New Hexion Common Shares (subject to the Agreed Dilution) and 27.5% of the Rights in the Rights Offering;
  • general unsecured creditors will be paid in full; and
  • holders of the Debtors’ outstanding common equity will receive no recovery on account of such common equity interests.

The Restructuring will be supported through the Debtors’ borrowing under a new, $350 million DIP term facility and a $350 million DIP ABL facility."

Restructuring Support Agreement 

In his declaration in support of the Chapter 11 filing (the “Knight Declaration” which attached an executed copy of the RSA), George F. Knight, the Executive Vice President and Chief Financial Officer of Hexion Inc., stated, the “RSA enjoys support at every level of the Debtors’ prepetition capital structure, and, as of the Petition Date, includes holders of approximately 70% of the debt to be restructured, including 62% of the First Lien Notes, 98% of 1.5 Lien Notes, 84% of the Second Lien Notes, and 76% the Borden Debentures. The RSA contemplates a financial restructuring that substantially reduces the Debtors’ leverage and treats all creditors fairly in accordance with their claims. In accordance with the RSA, the Debtors agree to propose a Plan predicated upon a total enterprise value of $3.1 billion, including an exit facility of approximately $1.6 billion and a stipulated post-new money equity value of approximately $1.4 billion. The new money in question results from a backstopped rights offering of New Hexion Common Shares offered at a 35% discount to the stipulated equity value and sized to yield $300 million in cash proceeds. The resulting total leverage at emergence is anticipated to be less than half of the Debtors’ prepetition leverage, based on 2019 EBITDA estimates.

The Debtors agree to propose a Plan that will distribute (a) to the 1L Notes Claims, $1.45 billion in cash (less the sum of adequate protection payments reflecting interest on the 1L Notes) and 72.5% of (X) the New Hexion Common Shares and (Y) the Rights in the Rights Offering, and (b) to the 1.5L Notes Claims, the 2L Notes Claims, and the Unsecured Notes Claims their pro rata share of 27.5% of (X) the New Hexion Common Shares and (Y) the Rights in the Rights Offering. General Unsecured Creditors will be paid in full."

Debtor-in-Possession (“DIP”) Financing

According to documents filed with the Court (including the RSA term sheet), as of April 1, 2019, the Debtors have lined up DIP financing in the form of (i) a $350.0mn DIP term loan (the “DIP Term Loan") and (ii) a $350.0mn DIP ABL facility (the “DIP ABL” and, together with the DIP Term Loan, the “DIP Facilities”). Borrowings under the DIP Term Loan (which will initially be borrowed by non-Debtor subsidiary Hexion International Holdings B.V. and guaranteed by the Debtors) will be used to repay the prepetition ABL. The DIP ABL is an asset-based revolving loan facility with a maximum availability of $350.0mn (subject to borrowing base limitations), which will be the primary vehicle through which the Debtors finance their operations during, and the costs of, the Chapter 11 Cases. 

Events Leading to the Chapter 11 Filing 

The Knight Declaration detailed the events leading to Hexion’s Chapter 11 filing. In what should send a chill through debt markets and over-levered boardrooms, the Knight Declaration makes very clear that it views the Company's Chapter 11 predicament as entirely resulting from the confluence of high leverage (9x 2018 segment EBITDA), looming debt maturities ($2.5bn in 2020) and tightening capital markets, stating “the Debtors have been advised that the current outlook in capital markets makes the likelihood of a reasonable refinancing of maturities unlikely…” and this in the context of what the Knight Declaration insists is “a strong business with a history of success and excellent long-term prospects.” 

The Knight Declaration states, The Debtors, together with the Non-Debtor Affiliates, participate in a highly competitive industry with constant pressure on revenue and margins, which in turn pressures EBITDA and liquidity. The Debtors also face near-term maturities of the majority of their funded debt. These two factors—declining liquidity and impending maturities—created an inflection point that required the Debtors to commence restructuring discussions with their key economic constituents in the late fall of 2018.

The Debtors’ high leverage and burdensome debt-service have created the current situation. The Debtors are over nine times levered relative to their 2018 segment EBITDA and face annual debt service in excess of $300 million. As debt service has remained high, liquidity has become a critical issue. The liquidity is further stressed in the first half of the year as seasonality in the Debtors’ business has historically resulted in working capital builds of more than $100 million during the first quarter.

The Debtors have continued to look for ways to reduce costs to improve profitability and cash flows across its businesses. In 2018, for example, the Company further reduced its global headcount and reduced its cost base by approximately $50 million. In 2018, SG&A represented 8% of the Company’s consolidated sales, which is very low for a chemical company of comparable size.

These cost reduction efforts contributed to strong performance in 2018. 2018 segment EBITDA of $440 million represents the Debtors’ best operational performance since 2012 and an improvement of 21% over the prior year. Despite this improvement, the Debtors were cash flow negative for fiscal 2018.

Even beyond the current liquidity issues, the Debtors’ leverage creates a second pressure—impending maturities. Approximately $2.5 billion of the Debtors’ secured debt matures in 2020. Repaying, in the absence of refinancing, these maturities is not a viable option, and the Debtors have been advised that the current outlook in capital markets makes the likelihood of a reasonable refinancing of maturities unlikely, given the Debtors’ leverage levels. As a result, the Debtors face a going-concern qualification in Hexion’s 2018 audit, which would create increased liquidity pressures from the Debtors’ vendors and would give rise to defaults under our ABL and cause cross defaults in all of our debt instruments.

Thus, faced with a lack of viable options available in the financial markets and the upcoming interest payments in respect of the 6.625% and 10.000% First Lien Notes in an aggregate amount of approximately $67 million, the Board, after engaging in months of good faith and arm’s-length negotiations with the Ad Hoc Groups as well as other stakeholders, ultimately determined that entry into the RSA and, thereafter, commencement of these Chapter 11 Cases to consummate the transactions contemplated by the RSA, was necessary to preserve the Debtors’ going concern value by de-levering their balance sheet."

The Knight Declaration attached the following documents: 

  • Exhibit A: Organizational Chart
  • Exhibit B: Executed Copy of Restructuring Support Agreement

About the Company

Hexion is the world’s leading producer of thermosetting resins, or thermosets, and a leading producer of adhesive and structural resins and coatings. Thermosets are a critical ingredient in most paints, coatings, glues and other adhesives produced for consumer or industrial uses. Hexion Inc. is incorporated in New Jersey; most of its co-Debtors are Delaware limited liability companies or Delaware corporations. The Debtors are headquartered in Columbus, Ohio. Hexion employs approximately 4,000 employees around the world, including approximately 1,300 in the United States across 27 production facilities.

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