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Rating Action: Moody's assigns first-time B1 CFR to Sparta U.S. HoldCo LLC; outlook stableGlobal Credit Research - 20 Apr 2021New York, April 20, 2021 -- Moody's Investors Service, ("Moody's") has assigned first-time ratings to Sparta U.S. HoldCo LLC (dba PQ Performance Chemicals) including a B1 Corporate Family Rating (CFR) and B1-PD Probability of Default Rating (PDR). Moody's also assigned B1 ratings to the company's proposed first lien credit facility, consisting of a $125 million revolving credit facility maturing 2026 and $750 million term loan due 2028. Proceeds from the first lien term loan, in addition to a $400 million equity contribution from the sponsors, Cerberus Capital Management L.P. and Koch Minerals & Trading, LLC, will be applied to the total purchase price of approximately $1.1 billion, including transaction and financing fees as well as funding a sizable cash balance. The outlook is stable.The ratings are subject to the deal closing as proposed and the receipt and review of the final documentation."The B1 rating reflects its strong market positions in several key markets for silicates and specialty silicas as well as good geographic diversity offset by leverage that is lower than most private equity transactions and solid margins, but it still suffers from a modest size and limited product diversity," said Domenick R. Fumai, Moody's Vice President and lead analyst for Sparta U.S. HoldCo LLC.Assignments:..Issuer: Sparta U.S. HoldCo LLC.... Corporate Family Rating, Assigned B1.... Probability of Default Rating, Assigned B1-PD....Senior Secured First Lien Term Loan, Assigned B1 (LGD3)....Senior Secured First Lien Revolving Credit Facility, Assigned B1 (LGD3)Outlook Actions:..Issuer: Sparta U.S. HoldCo LLC....Outlook, Assigned StableRATINGS RATIONALEPQ Performance Chemicals' B1 CFR reflects the company's leading industry positions in silicates, especially in North America, where it is estimated to have over 50% market share, spray dry silicates, silica gels and zeolites. Further supporting the rating is good geographic diversity with a global manufacturing footprint that ensures the ability to supply customers in a timely and cost-efficient manner. For its silicates products, competition is limited by transportation costs, which can be a meaningful expense for the delivered product. PQ Performance Chemicals' end market diversification and leading market positions contribute to relatively stable operating performance throughout economic cycles that should enable the company to operate with initial financial leverage that Moody's projects to be in the low-5x area in FY 2021 declining towards 5.0x in FY 2022. The rating also incorporates strong technical expertise, fairly significant barriers to entry given the capital investment and qualification requirements of customers and long-term customer relationships with a number of well-known brand names.PQ Performance Chemicals' B1 rating is constrained by its lack of scale as a number of key competitors are much larger and more highly rated. In addition, the rating is mitigated by limited product diversity and narrow business profile as the company's main products are largely silicates and silicate derivatives, which operate in fairly mature markets with low organic growth rates. While PQ Performance Chemicals has very good end market diversity, there is significant concentration with the detergent and institutional and industrial cleaning markets accounting for 23% of sales. Moody's also believes that while Cerberus and Koch offer operational capabilities and potential cost savings on raw materials and logistics, this benefit is offset by initial costs and carve-out risk as PQ Performance Chemicals becomes a stand-alone entity. The sizable initial cash balance combined with consistent free cash flow generation and flexibility under the credit facilities indicate that the company will focus on acquisitions rather than taking out dividends. The rating assumes that the company will pursue bolt-on acquisitions to add complementary products to boost market share outside of North America.PQ Performance Chemicals has a good liquidity profile and Moody's expects the company to maintain over the next 12 months. Pro forma for the financing, the company will have cash on the balance sheet of more than $75 million and full availability under its $125 million revolving credit facility. Moody's also expects the company to generate annual free cash flow in excess of $20 million over the next several years, which should further enhance its liquidity profile.The B1 rating on the senior secured credit facilities reflects their senior position in the capital structure. The first lien term loan is secured by a first lien on the assets of the borrower and guarantors, which include domestic subsidiaries and stock pledges in foreign subsidiaries. The proposed first lien term loan is not expected to contain financial maintenance covenants while the proposed revolving credit facility will contain a springing maximum first lien leverage ratio that will be tested when the revolver is more than 35% drawn at the end of the quarter.The new credit facilities are expected to provide covenant flexibility that could adversely impact creditors including an uncommitted incremental first lien facility amount not to exceed the greater of $158 million and 100% consolidated EBITDA, plus an unlimited amount subject to a first lien net leverage ratio that does not exceed the first lien net leverage ratio on the closing date, (for pari passu senior secured debt). Amounts up to $158 million and 100% of consolidated EBITDA may be incurred with an earlier maturity date than the initial term loans. Only domestic wholly-owned subsidiaries must provide guarantees, raising the risk of potential guarantee release; partial dividends of ownership interests could jeopardize guarantees with no explicit protective provisions limiting such guarantee releases. Collateral leakage is permitted through transfers of assets to unrestricted subsidiaries subject to carve-out capacity; there are no additional express "blocker" provisions restricting such transfer of specified assets to unrestricted subsidiaries.ESG CONSIDERATIONSEnvironmental, social and governance factors are relevant to the credit profile but are not key drivers of the rating. As a specialty chemicals company, environmental risks are categorized as moderate. PQ Performance Chemicals has a strong focus on sustainability as many of their products and innovations in end markets such as personal care, coatings and tires are geared towards becoming more environmentally friendly, improving safety and increasing energy efficiency. The company does not currently have any substantial litigation or remediation related to environmental issues. The major raw materials used in production includes silica derivatives from sand and soda ash, which are not harmful to the environment. Social risk is below-average as a number of the company's products and projects have favorable health and safety trends. For example, the company is developing zeolite technologies that help eliminate health risks associated with lead in PVC stabilization and replace phosphates in detergents that are harmful to both people and the environment. Governance risks are elevated due to private ownership, which includes a board of directors with minority representation by independent directors, a financial policy that includes elevated leverage and reduced financial disclosure requirements.The rating outlook is stable as the sponsors have capitalized the company on a relatively conservative basis ensuring solid credit metrics, but the company's small size and lack of product diversity limit future upside to the rating.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA rating upgrade would require Debt/EBITDA, including Moody's standard adjustments, to be sustained below 4.0x and the private equity sponsors demonstrated commitment to financial policies that maintain leverage at or below that level, an increase in scale to over $1 billion in revenue, improved product diversity, and for free cash flow to remain consistently positive. Moody's would likely consider a downgrade if Debt/EBITDA is sustained above 5.5x, if free cash flow is persistently negative, if there is a significant deterioration in liquidity, a large debt-financed acquisition or large dividend to the sponsors.The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.PQ Performance Chemicals, headquartered in Malvern, PA., is a leading global producer of silicates, specialty silicas and zeolites that have applications in diverse end markets such as personal care, industrial cleaning products, food & beverage and catalysts. The company is a carve-out from PQ Group Holdings Inc. and on March 1, 2021, a partnership of Cerberus Capital Management, L.P. and Koch Minerals & Trading, LLC announced a definitive agreement to acquire Performance Chemicals for a total purchase price of approximately $1.1 billion. The company generated pro forma revenue of approximately $610 million in the fiscal year ending December 31, 2020.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Domenick Fumai Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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