US Hexion blames bankruptcy on high debt

HOUSTON (ICIS)–Hexion filed for bankruptcy protection because of excessive debt, with a large chunk of it maturing next year, the US-based producer said on Monday.

By the time Hexion filed under Chapter 11, its annual debt service exceeded $300m, according to an affidavit by George Knight, chief financial officer (CFO).

The company had reached a leverage ratio of 9x in relation to adjusted earnings before interest, tax, depreciation and amortisation (EBITDA), he said.

On top of that, $2.5bn worth of debt matures in 2020, Knight said. Hexion doubts it can reasonably refinance these maturities, given the current outlook of capital markets.

As a result, Hexion could get a going-concern qualification in its 2018 audit, he said. This could cause a chain of defaults.

Over the years, Hexion has tried to sell off businesses to pay down its debt, Knight said. Starting in Q4 2017, it began targeting units within its Epoxy, Phenolics and Coatings Resins Division.

The resulting offers were insufficient to reduce Hexion’s debt levels, he said. The company later expanded the process to cover its Forestry Products Division.

Hexion sought buyers throughout 2018 and into 2019, but the offers were still too low for the company, Knight said.

The high debt levels were aggravated by other trends that cut into profits.

Hexion generates 60% of its sales outside of the US, Knight said. This exposure to global and business cyclicality led to flat or declining EBITDA profitability in 2012-2017.

In addition, the fall in oil prices led to a drop in demand for resin-coated sand, which is used in hydraulic fracturing, Knight said. Growth in other business units could not offset these declines.

It now appears the some oil producers have permanently shifted away from resin-coated sand, Knight said. As a result, the company’s Oilfield business unit is still operating below break-even EBITDA levels.

“The resulting liquidity and refinancing pressures have created an unsustainable drag,” Knight said. “High leverage and burdensome debt service have created the current situation.”

US-based Hexion filed for bankruptcy protection under chapter 11 on Monday after it reached a deal with most of its creditors, it said.

The company estimated that both its assets and liabilities are worth $1bn-10bn.

Secured debt totals, $3.7bn and unsecured debt is $363m, Knight said. The deal assumes a total enterprise value of $3.1bn.

The creditors with the largest unsecured claims include Blue Cube Operations at $7.04m; Southern Chemical at $7.02m; Mitsubishi at $5.85m; OCI at $3.79m; Dystar at $3.61m; and Methanex at $3.55m. Financial institutions had larger claims that were partially secured.

All of Hexion’s global segments are continuing to operate normally, and the filing should not affect its operations outside of the US, the company said.

Hexion’s proposed restructuring support agreement (RSA) calls for the following:

– De-leveraging of over $2bn. This will cut down the company’s debt.

– A rights offering that should provide the company with $300m in equity capital.

– A committed exit facility worth more than $1.6bn.

– Full payment of Hexion’s trade creditors, employees and other general unsecured creditors.

The RSA still needs confirmation from the bankruptcy court. Hexion said the proposal will eliminate a significant part of the company’s debt while putting it in a better competitive positions.

Meanwhile, Hexion has received commitments for $700m in debtor-in-possession (DIP) financing, it said. Companies use DIP financing to help fund their operations while they are under bankruptcy protection.

“We believe that with a stronger balance sheet, Hexion will be better positioned to further invest in our specialty product portfolio and capitalise on positive industry growth trends and our market leading positions,” said CEO Craig Rogerson.

Hexion makes epoxy resins and other thermoset resins.

The company filed for bankruptcy protection in US Bankruptcy Court, Delaware District Court. The case number is 19-10684.

The photo above shows courthouse steps. Image by Shutterstock

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