Rain CII Carbon LLC -- Moody's confirms RCC's ratings (B1 CFR); rates new debt; outlook stable

New York, December 03, 2012 -- Moody's Investors Service. Inc. ("Moody's") confirmed the B1 corporate family, probability of default, and senior secured notes rating of Rain CII Carbon LLC ("RCC"). At the same time, Moody's assigned a B1 rating to Rain Escrow Corp's ( a wholly-owned subsidiary of RCC) proposed senior secured notes due December 2020 ("2020 Notes"). The rating assumes that the merger between RCC and Rutgers closes as contemplated and on the terms as agreed. Upon consummation of the merger, Rain CII Carbon and CII Carbon Corp. (Co-Issuer) will become jointly and severally liable for the notes. The rating outlook is stable.

This rating action concludes the review for possible downgrade that began on October 23, 2012 following RCC's announcement that it had entered into an agreement to acquire Rutgers N.V. ("Rutgers") for EUR702 million or approximately $915 million. Rutgers is owned by Triton Partners and produces coal tar pitch products that are distributed to aluminum and steel manufacturers, among others. Proceeds from the offering will be used to fund the acquisition, including the repayment of all of Rutgers' existing debt balances.

RATINGS RATIONALE

The confirmation reflects RCC's larger global footprint and improved product diversity following the Rutgers acquisition. At the same time, the rating recognizes the increased leverage position and contraction in key debt protection metrics such as EBIT/interest, the step out nature of the acquisition in terms of the business being acquired, and the execution risk associated with the acquisition.

RCC's B1 corporate family rating reflects the company's free cash flow generation ability, the relative stability of its profitability and its good business fundamentals given its position as a leading supplier of essential carbon products to the aluminum industry. The rating also incorporates our view that RCC will continue to generate stable EBITDA and free cash flow going forward. While we believe that the acquisition of Rutgers is a medium to long-term credit positive, the rating considers the execution and integration risk associated with an acquisition of this size as well as some execution risks associated with the construction and operation of Rutgers Severtar joint venture with its Russian partner Severstal (Ba1 stable). On a pro forma basis, the combined company in fiscal 2011 achieved $1.9 billion in revenues and operated 17 production facilities located in at least seven countries.

Rutgers is the world's second largest coal tar distiller and a major producer of coal tar pitch (CTP), along with co-products such as naphthalene oil, aromatic oils and other carbon chemicals used in various industrial and consumer applications. Both CPC and CTP are key inputs in the production of carbon anodes used in aluminum smelting. Given Rutgers more European focused business base, the acquisition will expand RCC's footprint in Europe from less than 20% of revenues in 2011 to 45%, while reducing the company's concentration in the Americas.

Although we expect RCC's debt protection metrics such as debt-to-EBITDA and EBIT-to-interest expense to weaken from historical averages as a result of the additional debt to fund the acquisition, we believe that these metrics will remain well-positioned for the B1 rating level over the next 12 to 18 months, supported by both RCC's and Rutgers' stable operating performance and consistent positive cash flow generation.

Notwithstanding the aforementioned business advantages of the acquisition to RCC's credit profile, the transaction is transformative for the company given the size and scale of Rutgers and therefore carries near-term execution risk. Additionally, the business of Rutgers is characterized by a relatively high regulatory risk profile, especially for compliance with environmental, health and safety matters. Rutgers maintains provisions to cover future potential liabilities and Evonik Industries Ag (Baa3 positive), its owner, prior to Rutgers acquisition by Triton Partners in 2008, has indemnified Rutgers for any liability arising from environmental related claims dating back to the period when Evonik was the owner, ie before 2008. A further consideration is the weak global demand for aluminum and the uncertain timeframe for improvement. A material contraction in worldwide aluminum production could have an impact on RCC's financial condition.

The B1 rating on the senior secured notes reflects the benefit of the loss absorption provided by a considerable proportion of secured debt in the capital structure that is at parity with these instruments.

We believe that RCC will maintain good liquidity over the next four quarters, supported by positive operating cash flows and its cash position. Liquidity is further enhanced by a recently-executed $100 million asset-based revolver (ABL) that expires on November 2017. The company is required under the ABL to maintain a minimum fixed charge coverage ratio of 1.0 times should availability fall below $10 million. We expect RCC to maintain sufficient availability under the ABL over the next four quarters such that covenants will not be tested.

The stable outlook reflects the combined company's contract positions for CPC, GPC and CTP as well as its ability to generate positive cash flow in times of weak end user demand. However, the company is vulnerable to production curtailments in the aluminum industry, which would in turn result in lower demand for carbon-based products.

Given the relatively modest size of the company, its exposure to commodity-like products, dependency on the aluminum industry as an end market and the near-term execution risks associated with a significant acquisition, upward rating movement is unlikely at this time. However, the rating or outlook could be favorably impacted should the company successfully execute the integration of Rutgers and maintain stable operating performance. Specifically, the ability to sustain leverage (as measured by debt-to-EBITDA) of less than 3.0 times, EBITDA-to-interest above 5.0 times and free cash flow-to-debt of at least 10% could lead to upward rating momentum.

RCC's ratings could experience downward pressure if the fundamentals of its business were to dramatically deteriorate or key suppliers or off-takers were to move their business or curtail operations. In addition, an increase in leverage as measured by the debt-to-EBITDA ratio to more than 4.0 times or the inability to generate free cash flow could negatively impact the rating or the outlook.

The principal methodology used in rating RCC was the Global Chemical Industry Methodology published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Rain CII Carbon LLC (RCC) is a wholly owned subsidiary of Rain Commodities Limited (RCOL), an Indian domiciled company. RCC and its sister subsidiary Rain CII Carbon (Vizag) Limited (RCCVL), an Indian domiciled calcining company, rank among the top five calciners globally with consolidated CPC capacity of approximately 2.5 million metric tons, RCC accounting for roughly 1.9 million metric tons. RCC sells calcined petroleum coke (CPC) for two principal end uses: the production of aluminum and the production of titanium dioxide, although the majority of sales are to the aluminum industry. RCC also sells steam and electricity from waste heat generated during the calcining process. Through its planned acquisition of Rutgers N.V. ("Rutgers"), a leading coal tar distiller and major producer of coal tar pitch (CTP), along with co-products such as naphthalene oil, aromatic oils and other carbon chemicals, the company will add around 1.1 million metric tons of coal tar distillation capacity to its operations. For the twelve months ending September 30, 2012, RCC generated approximately $606 million of revenues.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

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Carol Cowan VP - Senior Credit Officer Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Brian Oak MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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