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Momentive Performance Materials files for Chapter 11

11:47 AM MDT | April 21, 2014 | —Francinia Protti-Alvarez and Robert Westervelt

Silicones and quartz maker Momentive Performance Materials (MPM; Albany), controlled by private equity firm Apollo Management, has filed for Chapter 11 bankruptcy protection in an attempt to implement a “prenegotiated” restructuring plan to reduce debt by $3 billion. MPM reports net debt of $4.1 billion and total assets of $2.7 billion as of 31 December 2013. Apollo owns a 90.4% equity stake in MPM.

MPM says it has a 14% global silicones market share, behind Dow Corning, which has 32% of the market.

“[A] fundamental shift in industry dynamics, including industry-wide overcapacity, [has caused] severe price pressure for the company’s basic products and the commoditization of lower-end specialty products,” Momentive’s executive v.p. and CFO, William Carter, says in a bankruptcy-related declaration filing. “[T]he company’s high net leverage has led to increasingly diminished liquidity for the company and the inability to properly fund operations.”

MPM says in bankruptcy filings that it has expended $437 million in cash since 2011. MPM posted a net loss of approximately $464 million for 2013 compared with the net loss of $365 million reported in 2012. Net sales were $2.4 billion for 2013, up 1.7% from 2012. Silicones account for roughly 90% of sales.

Overall demand growth for silicones remains attractive, but producers in China have added capacity more quickly than the market can absorb, according a recent report from IHS Chemical.

China accounts for nearly 40% of global silicone production capacity after the start-ups of several world-scale silicones plants built since the mid-2000s. China continues to build and will add the equivalent of nearly 20% of 2012 global demand through 2016, according to IHS Chemical. “Excess Chinese capacity threatens to destabilize the global silicones market,” says Aida Jebens, principal analyst at IHS Chemical.

MPM says a proposed “restructuring support agreement” (RSA) has been reached with holders owning approximately 85% of the company’s second-lien notes. This group includes Apollo, a controlling shareholder. Certain second-lien creditors have agreed to swap MPM debt for equity. Apollo “owns a significant portion of second-lien notes,” according to bankruptcy filings. MPM had outstanding second-lien debt valued at $1.3 billion as of 31 December 2013.

The RSA proposes that holders of more senior first-lien debt, which totals $1.5 billion, would receive cash payments to redeem their notes when Momentive exits bankruptcy if they support a plan of reorganization or replacement notes with an equal value if they reject the plan of reorganization. Bank of New York Mellon, trustee for the first-lien notes, says the agreement does not adequately protect its interests as a first-lien trustee or those of first-lien noteholders. “The debtors have cut a deal with their insiders and one tranche of debt while steadfastly ignoring other constituencies and declared victory,” Bank of New York Mellon says in a court filing.

The terms of the RSA include a $600-million equity rights offering together with commitments of $1.3 billion for exit financing that will reduce debt by $3 billion, MPM says. “With the support of certain of our key stakeholders, we intend to move quickly to implement our prenegotiated balance sheet restructuring plan. [This will] result in post-emergence liquidity of more than $300 million and net debt of approximately $1.2 billion,” says Craig Morrison, chairman and CEO of MPM.

MPM says it has received a commitment for $570 million in debtor-in-possession financing, led by J.P.Morgan.

The filing relates only to MPM and not to Momentive Specialty Chemicals (MSC; Columbus, OH), which has a separate capital structure, the company says. MSC had liquidity of $773 million as of 31 December 2013 and no material debt maturities prior to 2018, MPM adds. Private equity firm Apollo Management controls MPM and MPS. Apollo acquired MPM from General Electric for $3.8 billion in 2006.

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