KCC dragged down by Momentive takeover

By Nam Hyun-woo

KCC Chairman Chung Mong-jin

KCC's plan to acquire U.S. silicone maker Momentive Performance Materials has been raising concerns among ratings agencies and securities firms as the $3 billion deal will be a heavy burden for the financially-struggling construction materials maker.

Standard & Poor's Global Ratings recently put KCC on CreditWatch with negative implications, citing a possible deterioration in key credit measures related with the acquisition of Momentive.

Prior to S&P, Moody's Investors Service said it had rated KCC as “under review for downgrade,” following the company's announced acquisition of Momentive. Domestic rating house Korea Investors Service also said the company will need additional monitoring because of the possible increased financial burden.

Last week KCC announced that a consortium with two other entities had signed the $3 billion deal to wholly acquire Momentive, which would give it a 45 percent stake.

The deal is expected to make KCC one of the largest silicon producers in the world, but at the same time cause a financial burden for the company, analysts said.

“We expect KCC to pay around $1.35 billion of the total, giving it a post-deal 45 percent stake. If the company funds all its portion with debt, its adjusted debt leverage could increase 2.8 times from that as of the end of 2017,” S&P analyst Shawn Park said.

Park pointed out that KCC did not specify how the company plans to fund its part of the deal.

“KCC has not announced details of the transaction, including funding, timing and financial consolidation, and whether the company will sell liquid assets to offset the impact,” Park said.

KCC has been keeping its assets in stakes of other listed companies, including Samsung C&T, Hyundai Heavy Industries and Halla Corp. As of March, the company had about 4.1 trillion won worth of marketable securities on its balance sheet.

KCC had 559 billion won ($500 million) of cash or cashable assets at the end of June, according to a regulatory filing, meaning the company will likely opt to sell its investments or tap into other means such as issuing bonds.

“If KCC were to sell its investments to fund or deleverage itself following the acquisition, we believe the negative impact on its credit metrics could be mitigated,” Park said.

Moody's analyst Sean Hwang also stressed that KCC could be highly indebted due to the acquisition.

“While KCC has not yet disclosed the specifics of the deal, Moody's expects the transaction will require sizeable debt financing by a special purpose vehicle created by the KCC consortium,” Hwang said.

“This additional debt and the equity portion of the investment will raise KCC's leverage, and will not be fully offset by the EBITDA contribution from Momentive.” EBITDA refers to earnings before interest, tax, depreciation and amortization, which indicates a company's financial performance.

Hwang also warned of KCC's heightened business risk after the acquisition, saying the acquisition will improve the company's scale and geographic diversification but also expose it to “the highly competitive and cyclical silicone business.”

While analysts are showing negative responses, KCC said it is confident about financing the deal.

“Along with our cash and cashable assets, we have other liquidity we can tap into -- including stocks,” a KCC official said. “Though the three consortium members are yet to determine their respective contribution to the deal, we believe there will be no financial difficulty or burden to hamper it.”