Hexion Holdings – Emerges from Bankruptcy Minus $2.0bn in Debt and Sponsor Apollo Global Management, Delevers from 9x Segment EBITDA to 4x

July 1, 2019 – The Debtors notified the Court that their Second Amended Chapter 11 Plan had become effective as of July 1, 2019 [Docket No. 987]. Previously, on June 24, 2019, the Court approved the Debtors' Disclosure Statement and confirmed their Plan [Docket No. 914]. 

On 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 “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-10684. The Debtors, a global leader in thermoset resins, are 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 has been (since a series of 2004/2005 corporate transactions) controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (87% beneficial ownership).

At the time of filing, the Company’s petition noted between 1,000 and 5,000 creditors; estimated assets between $1bn and $10bn; and estimated liabilities between $1bn and $10bn. 

In a press release announcing the Debtors' emergence from Chapter, Hexion stated that: "it has successfully completed its balance sheet de-leveraging and emerged from Chapter 11. As a result of this process, Hexion has reduced its debt by more than $2.0 billion, received an infusion of $300 million in equity capital through a rights offering and raised approximately $2.0 billion in exit financing. With a strengthened capital structure and substantial free cash flow after debt service, Hexion is now well-positioned to make substantial reinvestments into its businesses to fuel strategic growth and drive value for its stakeholders."

Plan Summary

The memorandum in support of confirmation provides the following Plan overview:

“The Plan, which delevers the Debtors’ balance sheet by over $2 billion, embodies a consensual resolution of a panoply of litigable issues that could have sidetracked these cases, driving up their expense by multiples and damaging the Debtors’ business. The product of a restructuring support agreement to which over 90% of Debtors’ noteholders are party, the Plan maximizes creditor recoveries, including by providing for unimpairment of the Debtors’ trade and other unsecured creditors, and meets all confirmation requirements. It is, then, unsurprising—but validating—that the Plan enjoys overwhelming support from the Debtors’ noteholders, the voting creditors here. More than 1,000 creditors holding nearly $3.0 billion in claims across the Debtors’ capital structure cast votes on the Plan, and the results speak for themselves: 98% of those voting, holding more than 99% in amount of claims voted, chose to accept the Plan. With these votes in hand, the Debtors seek confirmation of the Plan. And with confirmation obtained, the Debtors intend to consummate the Plan and emerge from chapter 11 swiftly, so that they can continue their focus on being a worldwide market leader in the broad array of adhesive resins and related products they manufacture, but with a leaner, more sustainable capital structure…By developing and agreeing to the global compromise and settlement set forth in the Plan, including the treatment of noteholders and unimpairment of general unsecured creditors set forth therein, the Consenting Noteholders spared the estates from this value depletion. And the nearly unanimous support the Plan enjoys among the Debtors’ creditors evidences the reasonableness of that global compromise and settlement.

The Consenting Noteholders also made valuable financial contributions to these cases, backstopping almost $2 billion of new capital for the Debtors, including a $300 million equity rights offering and more than $1.6 billion of debt financing. As of this filing, the rights offering has been significantly oversubscribed and the Debtors are nearing completion of their new credit facilities and unsecured notes. Thus, the collective goal of the Debtors, Noteholders and key constituents has come together as envisioned when the Plan was filed on April 1, 2019.”

Post-Emergence Capital Structure

As discussed in "Events leading to the Chapter 11 Filing" below, the Debtors viewed their high prepetition leverage (9x 2018 segment EBITDA) as the key culprit in respect of their financial difficulties. Post-emergence, this leverage is to be cut in half (at least) calculated by reference to the $2.0bn of post-emergence debt and an expected segment EBITDA starting at $470.0mn for 2019 and rising to $593.0mn for 2023 (see financial projections attached to Disclosure Statement).

Summary of classes, claims, voting rights and projected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):

• Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $4.0mn and the estimated recovery is 100%.
• Class 2 (“First Lien Notes Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $2.425bn (including interest) and the estimated recovery is 84.6%-89.3%. Each Holder of an Allowed First Lien Notes Claim shall receive its Pro Rata Share of the 6.625% First Lien Notes Ration, the 10.000% First Lien Notes Ration or the 10.375% First Lien Notes Ration, as applicable, of the First Lien Notes Recovery (the latter being Cash in the amount of $1.45bn, less the aggregate amount of Adequate Protection Payments made to the Holders of First Lien Notes Claims during the Chapter 11 Cases, (ii) 72.5% of New Common Equity (subject to the Agreed Dilution), and (iii) 72.5% of the Rights). Range represents recoveries in the absence of Rights Offering participation (84.6%) through full Rights Offering Participation (89.3%).  
• Class 3 (“Junior Notes Claims’) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $1.061bn and the estimated recovery is 23.1%-27.1%. Each Holder of an Allowed Junior Notes Claim shall receive its Pro Rata Share of (i) 27.5% of New Common Equity, subject to the Agreed Dilution, and (ii) 27.5% of the Rights. Range represents recoveries in the absence of Rights Offering participation (23.1%) through full Rights Offering Participation (27.1%). 
• Class 4 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $228.0mn and the estimated recovery is 100%.
• Class 5 (“Subordinated Securities Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated aggregate amount of claims is $0 and the estimated recovery is 0%.
• Class 6 (“Intercompany Claims”) is impaired or unimpaired, deemed to accept or reject, and not entitled to vote on the Plan in either instance. The estimated aggregate amount of claims is N/A and the estimated recovery is N/A.
• Class 7 (“Intercompany Interests”) is impaired or unimpaired, deemed to accept or reject, and not entitled to vote on the Plan in either instance. The estimated aggregate amount of claims is N/A and the estimated recovery is N/A.
• Class 8 (“Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated aggregate amount of claims is $0 and the estimated recovery is 0%.

Plan Voting

On June 20, 2019, the Debtors' claims agent notified the Court of the results of Plan voting [Docket No. 848]. There were two classes that were entitled to vote on the Plan and each voted overwhelmingly to accept. 

The voting results were as follows:

• Class 2 (“First Lien Notes Claims”): 587 claims holders, representing $2,089,481,540.00 (or 99.99%) in amount and 98.82% in number, accepted the Plan. 7 claims holders, representing $159,000.00 (or 0.01%) in amount and 1.18% in number, rejected the Plan.
• Class 3 (“Junior Notes Claims”): 507 claims holders, representing $915,757,000.00 (or 99.90%) in amount and 96.39% in number, accepted the Plan. 19 claims holders, representing $943,000.00 (or 0.10%) in amount and 3.61% in number, rejected the Plan.
  

Prepetition Capital Structure

As of the Petition Date, the Debtors had funded debt outstanding of approximately $3.8 billion. The following table summarizes the Debtors’ prepetition indebtedness and capital structure:

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."

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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