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Trinseo Materials Operating S.C.A. -- Moody's changes Trinseo's outlook to negative after PMMA acquisition announcement

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Rating Action: Moody's changes Trinseo's outlook to negative after PMMA acquisition announcement

Global Credit Research - 17 Dec 2020

New York, December 17, 2020 -- Moody's Investors Service, ("Moody's") affirmed the ratings of Trinseo S.A. ("Trinseo"; Corporate Family Rating at Ba3) and its subsidiary, Trinseo Materials Operating S.C.A., subsequent to the announcement that the company has agreed to acquire the PMMA business of Arkema for roughly $1.4 billion. The transaction will be financed with up to $250 million of cash and up to $1.2 billion of new debt to be issued by Trinseo; the acquisition is expected to close in mid-2021. Moody's also maintained its Speculative Grade Liquidity Rating at SGL-1. However, the outlook was changed to negative from stable.

"The PMMA acquisition will significantly expand Trinseo's EngineeredMaterials business and increase margins, but the company is paying a full multiple for this business during a pandemic induced downturn and financing the majority of the purchase price with debt," stated John Rogers, Senior Vice President at Moody's and lead analyst on Trinseo.

Ratings affirmed: ..Trinseo S.A.

.Corporate Family Rating at Ba3

.Probability of Default Rating at Ba3-PD

..Trinseo Materials Operating S.C.A.

.Guaranteed senior secured revolver and term loan to Ba2 (LGD3)

.Guaranteed senior unsecured notes to B2 (LGD5)

Outlook

..Trinseo S.A. to negative from stable

..Trinseo Materials Operating S.C.A. to negative from stable

RATINGS RATIONALE

The affirmation of Trinseo's Ba3 Corporate Family Rating (CFR) reflects its size in terms of revenue and assets, significant and sustainable market positions in each of its segments, relatively stable profitability in specialty businesses and an experienced management team with a track record of conservative financial management.

The move to a negative outlook reflects uncertainty over the timeframe for a sustained recovery in the PMMA business, the impact of increasing global capacity in styrene and a roughly doubling of balance sheet debt due to the transaction. The ultimate impact of the coronavirus on key downstream markets for Trinseo's and the PMMA business' products is not certain and may not recover as quickly as currently anticipated, adding to the risk normally associated with a large acquisition that utilizes different technologies and services new market niches.

Management is taking significant actions to limit the negative impact from a credit standpoint by slashing the dividend, halting share repurchases and focusing on free cash flow generation to accelerate debt reduction after the acquisition. Trinseo also expects to generate $50 million of cost synergies over three years and an additional $25 million in synergies from converting the business to Trineso's ERP system. Trinseo's management expects to reduce unadjusted net leverage back to the mid-2x range by 2023.

Trinseo is acquiring the polymethyl methacrylates ("PMMA") and activated methyl methacrylates businesses from Arkema. PMMA is a transparent plastic used in a wide range of applications, including many that overlap with Trinseo's existing Performance Plastics business (will become part of the Engineered Material segment). The business is vertically back integrated into the monomer MMA, via a production facility in Europe and a long term cost-based contract in the US. While PMMA is normally associated acrylic sheet products, Arkema's PMMA business generates the majority of its profitability from the sale of compounded resins used in higher-value applications in auto, lighting, medical and electronics markets. The Arkema business suffers from relatively low growth in the US and Europe. Trinseo expects to generate faster growth by expanding sales into Asia.

Trinseo's Speculative Grade Liquidity rating of SGL-1 reflects excellent liquidity primarily supported by a cash balance, of roughly $300 million subsequent to the acquisition and the expectation that free cash flow will remain positive despite the slow recovery in demand in Europe. Additionally, the company has access to a $375 million revolver maturing in 2022 with $360 million of availability due to $15 million in letters of credit, and a $150 million A/R securitization that had no outstanding borrowings but was limited by collateral to roughly $127 million. The company has a springing covenant in its revolver which requires the company to maintain a pro forma first lien net leverage ratio of less than 2.0x, if greater than 30% is drawn. The company will likely have no difficulty in meeting this covenant over the next 12-18 months, assuming that the additional debt it issues to fund the acquisition is unsecured.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade to the rating is highly unlike over the next 2-3 years due to the additional debt incurred to fund the acquisition of the PMMA business. However, the CFR could be upgraded if Trinseo's businesses excluding Polystyrene and Feedstocks consistently generates EBITDA of over $450 million, balance sheet debt falls to roughly $1.5 billion and free cash flow remains above $150 million. This would also imply that leverage during the next downturn would not rise above 4x. The rating could be downgraded if leverage remains above 4.5x in 2023 or if the company fails to generate free cash flow on a sustained basis.

ESG CONSIDERATIONS

Environmental, social and governance (ESG) factors are important considerations in Trinseo's credit quality. The company is exposed to environmental and social risks typical for a large, diversified chemical company. The company has below average exposure to environmental liabilities as they have an indemnification from Dow (Baa2 stable) on all liabilities prior to the carve-out from Dow in 2010. However, Trinseo does have exposure to stryene, which is "reasonably anticipated to be a human carcinogen" by the US regulatory authorities. Given the size of the company's styrene operations this is a modest credit negative and increases environmental and social risk.

Moody's noted that many chemicals have received the same designation or a more severe designation - known to be a human carcinogen - with minimal impact on the chemical's use in industrial applications. The concern for styrene, and most other industrial chemicals, is that consumer behavior can be influenced by partisan public relations campaigns and non-scientific studies. In Moody's view, the largest end-use that could be at risk given this designation would be for polystyrene used in food contact applications - food packaging and disposable cups and cutlery. However, this is a small portion of Trinseo's polystyrene business (about 10%).

Recycling of plastics is a rising social risk causing many packaging and consumer productions companies to reassess their package designs and materials. Moody's believes that certian plastics like polystyrene and PVC may be deselected in these applications over time in order to increase the quality of recycled plastics. While polystyrene is easy to recycle on its own, it can significantly degrade the performance of recycled plastic when comingled with polyethylene and polypropylene.

Trinseo's governance-related risks are lower than average as it has an independent board of directors, detailed reporting requirements, management's a track record of support for a relative conservative amount of balance sheet debt (1-2x leverage at the peak of the cycle).

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.

Trinseo S.A. is the world's largest producer of styrene butadiene (SB) latex, the largest European producer of SSBR rubber (solution styrene butadiene rubber), the third largest global producer of polystyrene and a sizable producer of engineered polymer blends. Trinseo typically has revenues of $3-4 billion depending on petrochemical feedstock prices, 24 manufacturing sites around the world, and over 2,700 employees.

REGULATORY DISCLOSURES

For 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.

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.

John Rogers Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Glenn B. Eckert Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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