Global Chemical Industry

www. moodys. com military rank methodology Table of Contents Summary About the Rated Universe About This judge methodological abridgment The tonalityst ace evaluate components Assumptions and Limitations and evaluate Conside proportionalityns That argon non Covered in the footb each(prenominal) field Conclusion Summary of the football fieldIndicated military military rank Outcomes addition A orbiculate Chemcial exertion methodology federal agent control grid supplement B methodological analysis GridIndicated military ratings Appendix C Observations and Outliers for Grid Mapping Appendix D chemic application Over learn Appendix E learn Rating Issues over the Intermediate Term 1 3 5 8Corpo judge finance celestial latitude 2009 moodys globular orbiculate chemical substance substance Industry Summary This military paygrade methodology explains dismals approach to assessing credit risk for global chemical companies. This document replaces a previous publi cation from February 2006. The control gridironiron for the place methodology is substanti all toldy unchanged from the 2006 publication, with minor updates to set aside great clarity regarding application of the grid. We withal make believe provided a cle arr explanation of how evaluations in the chemical manufacturing be derived.This publication is intended to provide a reference tool that finish be intaked when evaluating credit profiles indoors the global chemical industry, helping issuers, investors, and separate sakied foodstuff break openicipants understand how key qualitative and quantitative risk characteristics atomic number 18 likely to affect rating payoffs. This methodology does non take an exhaustive treatment of all calculates that argon reflected in temperamentals ratings that should enable the reader to understand the qualitative stipulations and pecuniary ratios that atomic number 18 frequently or less classic for ratings in this orbit.This base implys a detailed rating grid and illustrative procedure of apiece rated phoner in a representative sample of companies against the factors in the grid. The purpose of the rating grid is to provide a reference tool that female genitalia be drug ab phthisisd to approximate credit profiles within the chemical industry sector. The grid provides summarized guidance for the factors that are generally just about important in duty set upment ratings to chemical companies. The grid is a summary that does not include every rating mete outation, and our illustrative mathematical function uses historical moderates while our ratings methodology as well considers onwards-looking expectations.As a result, the grid-indicated rating is not expected to rack up the positive rating of each friendship. 17 18 19 20 21 26 27 Analyst Contacts New York 1. 212. 553. 1653 William Reed infirmity President -Senior Credit Officer John Rogers Senior Vice President James Wilki ns Vice President -Senior Analyst St veritable(a) Wood Senior Vice President not bad(p) of Japan 81. 35408. 4100 Noriko Kosaka Vice President -Senior Analyst Analyst Contacts continued on last page Rating Methodology disconsolates globular incorporated Finance spherical chemical substance IndustryThe grid contains five key factors that are important in our assessments for ratings in the global chemical sector 1. business organization Profile 2. sizing & st business leader 3. Cost condition 4. leverage / mo wampumary Policies 5. Financial force out Each of these factors besides encompasses a soma of sub-factors or inflection, which we explain in detail. Since an issuers scoring on a grouchy grid factor much will not match its overall rating, in the Appendix we include a brief backchat of outliers companies whose grid-indicated rating for a specific factor differs signifi puketly from the actual rating.This rating methodology is not intended to be an exhaustive wa tchword of all factors that darks analysts consider in ratings in this sector. We air that our analysis for ratings in this sector covers factors that are general across all industries ( much(prenominal) as ownership, heed, liquidity, legal structure in the corporate organization, and corporate governance) as closely as factors that can be meaningful on a company specific basis. Our ratings consider qualitative considerations and factors that do not leave themselves to a transparent demonstrateation in a grid embodimentat.The grid represents a compromise betwixt greater complexness, which would result in grid-indicated ratings that mathematical function much closely to actual ratings, and simplicity, which enhances a transparent presentation of the factors that are most important for ratings in this sector most of the measure. Because this methodology applies globally, it is necessarily general in nearly respects and is not intended to be an exhaustive and country-spec ific discussion of all factors that rancids analysts consider in every rating. sorrys rating approach considers country-specific differences and at the same time allows for qualitative evaluation of these factors as hearty as otherwise factors that cannot be easily presented in grid format. Highlights of this musical theme include ? ? ? An overview of our rated universe. A description of the key factors that drive rating quality. Comments on the rating methodologys assumptions and limitations, including a discussion on other rating considerations that are not included in the grid.The Appendices guide the rating grid criteria on one page (Appendix A), tables that illustrate the application of the methodology grid to 20 representative rated chemical companies (Appendix B) with explanatory comments on some of the more than significant differences between the grid-implied rating and our actual rating (Appendix C), a brief industry overview (Appendix D), and a discussion of key r ating issues for the chemical sector over the intermediate term (Appendix E). 2 December 2009 ? Rating Methodology ? dark-skinneds world-wide corporate Finance ball-shaped chemical substance Industry Rating Methodology moodys spheric incarnate FinanceGlobal chemic Industry About the Rated Universe Moodys rates 107 companies globally in the chemicals and allied industries. In the aggregate, these issuers assimilate approximately $230 billion of rated debt. Our definition of the chemical industry includes a variety of colligate industries, such as ? ? ? ? ? ? ? ? ? ? ? ? Commodity organic and inorganic chemicals ? Specialty chemicals ? Plastics, resins and elastomers ? Fertilizers, agricultural chemicals and manipulateds ? Industrial gases ? Architectural and industrial coatings ? Flavors and fragrances ? otherwise food ingredients ? Pharmaceutical intermediates ?Organometallics ? Specialty materials produced from refinery by- harvest-feasts ? Specialty materials that ar e use in composites ? These companies develop and produce a wide variety of products including basic chemicals, speciality materials, and industrial gases. Products cat from confessedly commodities to postgraduately customized products used in technically dealing applications. The rated universe is spread doneout the world with the highest concentrations in the Americas (68), Europe (24) and Middle East/Asia (15). Companies range in size from as large as $40 billion in revenues to as underage as $100 million.Some whitethorn be multinational with numerous manufacturing lieus around the globe, while others may turn tail a single facility with domestic customers notwithstanding. The highly vaporific nature of the industry as thoroughly as fairly high levels of business risk make it increasingly difficult for all but a select few companies who are extremely large and diversified to achieve and maintain a Aa rating. Ratings of A3 or preceding(prenominal) are generally lim ited to larger companies or to smaller specialty companies that abut un public stability in financial performance and coitusly low business risk.The corporal Family Rating (CFR) or senior unsecured ratings of the covered issuers range from Aa2 to Caa2 with a concentration in the utter, Ba and B rating categories. The median rating for chemical companies is Ba1. The vast majority of companies 81 out of 107, approximately 76%, are in the utter (27), Ba (26), and B (28) range because of the alternate(prenominal) nature of the industry and our view of the industrys moderate to high business risk. 3 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global chemical substance Industry Rating Methodology Moodys Global Corporate FinanceGlobal Chemical Industry Exhibit 1 Global Chemical Rating Distribution 2009 and 2006 Chemical Industry Ratings Distribution 25 Number of Issuers 20 15 10 5 0 Aa2 Aa3 A1 A2 A3 let out1 emit2 blate3 Ba1 Ba2 Ba3 Ratings 2009 107 co m panies 2006 111 com panies B1 B2 B3 Caa1 Caa2 Caa3 Over the last ten days, in Europe and in the US, a stiring number of defective grade names perplex been added to the rated universe. This is attributable in part to incumbents recent strategic efforts to tapersing on their core businesses by selling non-core assets as strong as to a growing interest from private equity sponsors.For the purpose of this methodology we have identified 20 representative issuers out of the companies that we rate globally. These issuers represent both(prenominal) investment grade and speculative grade issuers. The criteria used to select the 20 centre on the larger, in terms of revenues, well-known issuers. For this case the proportion of investment grade to non-investment grade issuers de tonal patternated is higher than it is in the rated universe. 4 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Fin anceGlobal Chemical Industry Exhibit 2 Global Chemical Rating Methodology Representative ideal keep company Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Shin-Etsu Chemical high society Ltd BASF (SE) E. I. du Pont de Nemours and Company Kaneka union Teijin special Bayer AG Akzo Nobel N. V. potash fraternity of Saskatchewan Inc. Rating Aa3 A1 A2 A2 A3 A3 bleat1 emit1 Baa1 Baa2 Baa2 Baa3 Ba1 Ba2 Ba3 Ba3 B1 B1 B1 B3 Outlook horse barn Stable ban Stable Negative Stable Negative Stable Stable Stable Stable Negative Stable Positive Stable Stable Stable Stable Positive NegativeApprox Debt millions $189 $21,347 $7,545 $293 $2,143 $20,215 $5,233 $3,082 $2,716 $1,441 $1,971 $23,073 $4,456 $3,390 $3,156 $1,217 $1,904 $4,681 $423 $3,451 LG Chem, Ltd. Eastman Chemical Company Yara International ASA The Dow Chemical Company Braskem SA Celanese tummy Nalco Company ISP Chemco LLC NOVA Chemicals Company Huntsman Corporation PolyOne Corp Hexion Specialty Chemicals Inc. About This Rating Methodology This report explains the rating methodology for chemical companies in six sections, which are summarized as follows 1.Identification of Key Rating Factors The grid in this rating methodology focuses on five key rating factors. These five broad factors are further confounded down into eleven sub-factors that are evenly weighted. 5 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry Factor Weighting Sub-Factor Weighting Rating Factor Relevant Sub-factor Operational Diversity Product Diversity Geographic Diversity Factor 1 course Profile 9. 09%Commodity/Specialty Market Shares crank Material Access Government restore revenue enhancements 9. 09% 9. 09% 9. 09% 9. 09% 9. 09% 9. 09% 9. 09% 9. 09% 9. 09% 9. 09% Factor 2 sizing & stability 27. 27% Divisions of Equal size stability of EBITDA Factor 3 Cost function 18. 18% EBITDA brim (5 yr Avg. ) ROA EBIT / Avg. Assets (5 yr Avg. ) Factor 4 Leverage / Financial Policies 18. 18% Current Debt / corking* Debt / EBITDA (5 yr Avg. )* EBITDA/ occupy Expense Factor 5 Financial Strength 27. 27% bear hard cash consort/Debt (5 yr Avg. )* impeccant Cash Flow (FCF) /Debt (5 yr Avg. * *Where particularise net adjusted debt may be used (see discussion of Cash Balances and cyberspace Debt Considerations) 2. Measurement of the Key Rating Factors We explain below how the sub-factors for each factor are calculated. We also explain the rationale for victimization specific rating mensurables, and the ways in which we apply them during the rating process. Much of the randomness used in assessing performance for the sub-factors is found in or calculated using the companys financial statements others are derived from observations or stimates by Moodys analysts. Moodys ratings are forward-looking and incorporate our expectations of succeeding(a) financial and run performance. We use both historical and projected financial results in the methodology and the rating process. Historical results help us to understand patterns and trends for a companys performance as well as for peer comparison. While the rating process includes both historical and anticipated results, this document makes use of historical data only to illustrate the application of the rating methodology.Specifically, unless otherwise stated, the partping examples in this report use reported financials for the last three audited fiscal years. All of the quantitative credit prosody incorporate Moodys standard adjustments to income statement, exchange give statement and rest sheet bars for, among others, off- remnant sheet accounts, due securitization programs, under-funded support obligations, and recur operate leases. Note For definitions of Moodys most common ratio terms please see Moodys Basic Definitions for Credit Statistics, Users Guide which can be found at www. oodys. com in the Res earch and Ratings coachory, in the Special Reports subdirectory (07 June 2007, document 78480/SP4467). 3. Mapping Factors to the Rating Categories After identifying the cadences for each factor, the potential outcomes for each of the 11 sub-factors are mapped to a broad Moodys rating category. (abdominal aortic aneurysm, Aa, A, Baa, Ba, B, Caa, Ca). 6 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry 4.Mapping Issuers to the Grid and Discussion of Grid Outliers In this section (Appendix C) we provide tables showing how each company maps to grid-indicated ratings for each rating sub-factor and factor. The weighted average of the sub-factor ratings produces a grid-indicated rating for each factor. We highlight companies whose grid-indicated performance on a specific sub-factor is dickens or more broad rating categories higher or swallow than its actual rating an d discuss general reasons for such positive outliers and negative outliers for a particular factor or sub-factor. . Assumptions and Limitations and Rating Considerations That are not Included in the Grid This section discusses limitations in the use of the grid to map against actual ratings, additional factors that are not included in the grid that can be important in determining ratings, and limitations and key assumptions that pertain to the overall rating methodology. 6. Determining the overall Grid-Indicated Rating To determine the overall rating, we convert each of the 11 factor ratings into a numeric value ground upon the case below.Aaa 6 Aa 5 A 4 Baa 3 Ba 2 B 1 Caa 0 Ca -1 The numerical bulls eye for each factor is weighted equally with the results then summed, and divided by 11, to produce a total factor score. The total factor score is then mapped back to an alphanumeric rating based on the ranges in the table below. Grid-Indicated Rating Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca Total Factor Score X ? 5. 50 5. 17 ? X 5. 50 4. 83 ? X 5. 17 4. 50 ? X 4. 83 4. 17 ? X 4. 50 3. 83 ? X 4. 17 3. 0 ? X 3. 83 3. 17 ? X 3. 50 2. 83 ? X 3. 17 2. 50 ? X 2. 83 2. 17 ? X 2. 50 1. 83 ? X 2. 17 1. 50 ? X 1. 83 1. 17 ? X 1. 5 0. 83 ? X 1. 17 0. 50 ? X 0. 83 0. 33 ? X 0. 50 0. 17 ? X 0. 33 0. 0 ? X 0. 17 x 0. 0 7 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry For example, an issuer with a composite weighted factor score of 1. 5 would have a Ba2 grid-indicated rating. We used a exchangeable procedure to derive the grid-indicating ratings in the tables embedded in the discussion of each of the five broad rating factors. The Key Rating Factors Moodys analysis of chemical companies focuses on five broad factors ? ? ? ? ? bank line Profile Size & Stability Cost Position Leverage / Financia l Policies Financial Strength Factor 1 Business Profile (9. 09% weight) why It Matters Business Profile is an important indicator of credit quality.The chemical team at Moodys looks at seven factors and aggregates them into a single score which is then mapped to a specific rating. The first three factors focus on mixed bag. Diversity, whether it be operational, product, or geographic, is a key component of business position that, can help mitigate the capriciousness in financial performance characteristic of the chemical sector. 1. Operational Diversity Single site locations, as an indicator of operational diversity, can expose a company to the conniption of unanticipated down times.We note that this factor is extremely important. Where a company operates a single site, the risk of that single site failing is deemed to have such a catastrophic conflict on the business model that even the prospect of site insurance or business interruption insurance will not provide satisfactor y mitigation against the potential effects of a fundamental failure of the site. 2. Diverse Product Lines Diverse product lines can help stem un presageability in cash escapes to the extent that distinct products can have varied pricing dynamics. 3. Geographic DiversityGeographic diversity can also be beneficial as a company with multiple plant sites can still be negatively affected by both economic and weather related events. 4. Commodity Versus Value Added Products In the chemical sector favourableness players are typically more volatile in terms of cash run away generation whereas the value added producers frequently produce more stable cash flows. At times, todays value added producers can become more commodity-like in their cash flow generating capabilities, so we will carefull assess where a product or convocation of products may be in its life cycle. 5.Market Share or Unique Competitive Advantage ample market share suggests a sustainable business position with the p roven ability to weather the volatile market conditions in the chemical cycle. In some instances companies with large market shares will adjust their fruit volumes to help balance the supply and pack dynamics in the markets served as a means to change product pricing. Market share that is protected by patent and unique licensing restrictions can also be a strong, positive contributor to stable cash flows and performance. 8 December 2009 ? Rating Methodology ?Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry 6. Exposure to Volatile Raw Materials Raw material picture shows greater than 33% in terms of court of goods sold, for example, can often result in dramatic swings in cash flow. This is specially true in times of supply/demand imbalances, which can bring into being ill-consideredages in lancinating materials and exaggerate raw material wrong movements. Companies with the ability and pre vision to locate their take facilities in areas of the world where they can benefit from long term fixed riced raw materials have a distinct advantage over companies that are subject to the vagaries of the raw material level markets. 7. Impact of Government Regulation The final factor we assess is the positive or negative continue of brass regulation. This factor addresses the positive or negative role that government regulation or policy may have on an individual company or sector of the chemical industry. For many companies, the impact of government regulation may be neutral. For some sectors, such as the ethanol sector in the U. S. the very existence of the sector is a function of government legislated policy. In still other instances, the government has sought to ban the use of genuine products such as MTBE in some markets. This factor is also extremely important and we will, as explained below, overweight it when assessing companies for whom government regulations/manda tes are, essentially, the sole driver for the business model. How We Measure it for the Grid The 7 Business Profile criteria are merged into an assessment score, as follows Business Profile opinion Score This score is made up of seven criteria.To each we assign a discrete numerical value. The values across the criteria range from (-2) to 2 with many coming in at 0 or 1. Moodys analysts may use a modifier of 0. 5 across the seven criteria to refine the score relative to other companies in the industry. These values are totaled into a score which is then mapped to a rating category in the following manner Aaa Aa A Baa Ba B Caa Ca = = = = = = = = 6. 0 4. 5 to 6. 0 3. 5 to 4. 5 2. 5 to 3. 5 1. 5 to 2. 5 0. 5 to 1. 5 0. 5 to 0. 5 0. 5 ?Operational diversity We count the number of discrete operating plants that have a globally competitive scale. A (-2) is assigned for 1 or 2 plants, a 0 is assigned for 2 8 plants and a 1 is assigned if in that respect are greater than 8 large manufacturing locations. This is one of three factors with a negative score given the importance we assign to operational diversity. A sole site simply leaves the company with too many eggs in one basket. Product diversity We assign a 0 if a majority of cash flow is becomed from 1-2 key product lines and a 1 if a company relies on 3 or more product lines or product categories.Geographic diversity We assign a 0 if a majority of the production assets are primarily in a single geographic region and assign a 1 if production assets are in multiple regions Commodity versus value added products We assign a 0 if a majority of sales are primarily commodity products and assign a 1 if we view products as adding distinct unique additional value. Quantitative factors such as stability of EBITDA and EBITDA margins are used posterior as another component in the measuring stick of this important factor. ? ? ? 9 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Glob al Chemical IndustryRating Methodology Moodys Global Corporate Finance Global Chemical Industry ? Market share We assign a 0 if a market share is inconsequential relative to the near three largest competitors and assign a 1 if a sector or company has large share or few solid competitors. We would assign a 2 if the company has a unique competitive advantage (patents, know-how, etc. ) that could geld competition significantly. Market share assessments are driven by the definition of the markets served. Definitions should be wide passable to represent legitimate alternative products.Raw material access We assign a (-1) or (-2) if we picture exposure to volatile raw material cost at greater than 33% of costs of goods sold. We assign a 0 if exposure to volatile raw materials costs is from 10% to 33% of costs of good sold. We assign a 1 if the exposure to raw materials is less than 10% and a 2 if the company has a material, demonstrable, long-lived feedstock advantage. Given the i mportance of raw material inputs to ultimate cash flows this metric is vitally important. It is one of three metrics with a possible negative value. Given the importance of this metric, the value can go as high as 2.Impact of governmental regulations or policies For companies subject to significant government regulations or reasonable to changes in government policies, we assign a score reflecting the positive or negative impact of these regulations/policies on the companies long term financial performance. Most of the companies in this industry will score a 0. ethanol producers in the US would be assigned a (-1) because of their reliance on government regulation to create demand for the product. Companies that would be positively affected over the long term by government regulations could be assigned a 1. ? The importance of the business profile score is highlighted by the fact that, in certain cases, it can outweigh all other factors in the methodology, materially lowering rati ngs. The dickens most giving examples are operations limited to a single site and a business model whose mastery is highly or solely qualified on government actions or policies. Factor 1 Business Profile (9. 09%) Weight a) Business Position Assessment 9. 09% Aaa ? 6. 0 Aa 4. 5 6. 0 A 3. 5 4. 5 Baa 2. 5 3. 5 Ba 1. 5 2. 5 B 0. 5 1. 5 Caa 0. 5 0. 5 Ca 0. 5A chart that illustrates grid mapping results for Factor 1 and a discussion of outliers for companies in the sample is included in Appendix C. Factor 2 Size & Stability (27. 27% weight) Why It Matters This factor includes discrete quantitative measures that attempt to measure size, diversity and the stability of a business model. Large revenues combined with large divisions as well as a long explanation of stable performance suggest sustainable business positions that have been and will be able to incontrovertibly weather the vagaries of big(p) and economic cycles. SizeSize can suggest the ability to benefit from much wishinged economies of scale both in production and access to raw materials on a preferred basis. In addition, size suggests the ability to operate large customers globally an important attribute as many customers step up efforts to reduce the number of their suppliers. Size also tends to favor the companies that sovereigns, government related entities, and other large companies take aim as their joint venture partners or technology suppliers of chemicals that add important value added properties to customers products. Number of DivisionsThe presence of multiple large divisions typically signals a balanced diversified product portfolio and, by extension, more stable cash flows. Companies with high product concentration may give away more volatile cash flows and may be more vulnerable to one time events that can be disconfirming to credit quality. Multiple divisions also provide for discrete assets that can be sold as prerequisite to provide alternate liquidity. Larger companie s 10 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate FinanceGlobal Chemical Industry with many divisions can, for example, sell weaker performing or non-core segments, with the sale proceeds providing living for debt reduction or growth in other segments. Stability of Business Model (Stability of EBITDA) Given the diversity of this industry, we attempt to gauge the likely level of irritability in earnings and cash flow. Companies with elevated levels of capriciousness in earnings and cash flow will require better liquidity and more lively financial metrics, on average, to compensate for uncertainty over the magnitude and duration of potential downturns.We analyze the volatility of EBITDA over a long period of time (7-10 years, when the data is available) to get an estimation of the expected volatility of the company relative to its peers in the industry. While there are many problems assoc iated with the use of EBITDA as a measure of both positiveness or cash flow, EBITDA is typically less affected by wondrous items, fluctuations in works large(p), and capital letter spending on new capacity than other measures of cash flow. It also allows us to remove the potential impact from differences in capital intensity across the industry.To the extent that a companys EBITDA may contain unusual items, or items that we judge to be one-time, the reported data may be adjusted to improve the quality of the analysis and hence get a better view of the true volatility of the company relative to its peers in the industry. When companies have completed a transformational acquisition or divestiture, or if seven years of data is otherwise unavailable, we estimate this metric based on a comparison to other rated companies and attempt to adjust for differences in product or geographic mix, as well as the impact of feedstock advantages or disadvantages.A transforming transaction is typ ically defined as the acquisition or divestiture of assets that comprise more that 1/3 of the pre-transaction EBITDA. While we measure the past 7-10 years of data, we would emphasize that our ratings are a forward view informed by historical volatility. To the extent we believe that futurity performance might deviate from historical patterns, we will modify this factor. How We Measure it for the Grid Size Measured by Revenues We use the most recent annual revenues or latest 12 month reported revenues.The current years revenues obviously can be either understated or overstated subject to where the company is in the commodity price cycle. While the commodity price cycle may be different for diverse companies, this metric measures all companies, by and large, at the same point in the economic cycle. For companies whose revenues are on the border between two ratings categories, the analyst would consider the point in the commodity price cycle at which the measurement is taken and th e estimate of future revenues. Divisions with Revenues of Equal Relative SizeThis factor can be captured from financial statements. We use the segment information found in the most recent quarterly report on a latest four quarter basis. We are attempting again to capture both diversity as well as scale. The analyst may adjust segment revenues manually to adjust for non-ordinary items or non-public segment information provided by management. For companies whose divisional revenues are volatile and subject to cycles, the analyst would again consider the point in the pricing cycle at which the measurement is taken.Our focus is to measure diversity of revenue streams. For a company with $1 billion in revenues if all revenues come from a sole division/product it would map to a B. If there were four discrete divisions with $250 million in revenues each (essentially equal in size) it would map to a Baa. For a company with $10 billion in revenues with four discrete divisions/products, if t wo divisions had $3 billion in revenues each and 2 divisions had $2 billion in revenues each it would still be judged to be relatively diverse and equate to a Baa. 1 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry Stability of EBITDA This factor is heedful by the normalized standard fracture of the companys EBITDA as determined by a least squares regression on seven to ten years of data. We utilize standard illusion rather than standard deviation as it is much better at differentiating between commodity and specialty chemical companies.Standard deviation is a soundless measure that cannot clearly differentiate between a stable company growing over time and a commodity company whose volatility is induced by changes in its cash margins. Standard error is a statistical measure of the difference between the companys actual performance versus a theoretical line drawn through the data (hence normal growth in EBITDA over 7-10 years should not have a negative impact on this metric). The normalized standard error is obtained by dividing the standard error obtained from a linear regression by the average EBITDA over the period analyzed.This allows us to compare the standard error of large companies to much smaller companies This measurement is designed to capture two types of stability For smaller companies The stability of business or businesses relative to other companies in the industry. The absolute size of a company is not considered. For larger companies A very large or diverse commodity company may exhibit more stability based on the number of businesses in its portfolio, especially if the earnings of their individual businesses are not correlated (i. e. , all businesses dont go into a downturn or upturn at the same time).In statistical terms, if the covariance of the companys businesses is low, the companys performance should be more stable although it may be an inherently cyclical commodity chemical business. Companies with a normalized standardized error above 40% (which maps to the Caa category) are most common for companies with very low or negative EBITDA at the bottom of a downturn. Factor 2 Size & Stability (27. 27%) Weight a) Revenue (Billions of US$) b) of Divisions of Equal Size c) Stability of EBITDA 9. 09% 9. 09% 9. 09% Aaa ? $50 8 2% Aa $20 $50 6 to 7 2% 6% A $10 $20 5 6% 12%Baa $5 $10 4 12% 20% Ba $1 $5 2 or 3 20% 30% B $. 2 $1 1 or 2 30% 40% Caa $. 1 $. 2 1 40% 60% Ca $. 1 0. 5 ? 60. 0% A chart that illustrates grid mapping results for Factor 2 and a discussion of outliers for companies in the sample is included in Appendix C. Factor 3 Cost Position (18. 18% weight) Why It Matters Relative cost position is a critical achiever factor for a chemical company because, in a downturn, (either cyclical or economic) prices often slide down to the point where only companies with first and second quartile cash costs generate meaningful cash flow. direct cost positions are a function of criteria that include size, access to low cost raw material inputs, location of assets, labor rates, and capital invested. Further, with low levels of financial leverage, low cost producers are typically better positioned to vanquish competitors. Low cost producers, with low leverage, are better able to survive in a downturn and are also better positioned to grow when opportunities arise. A companys cash costs and its position on the industry cost curve, as well as the overall shape of the industry cost curve, are all valuable information.However, true cash cost curve data, while useful, is often proprietary or may be the property of various consultants and difficult to verify. 12 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry Comparisons across the wide variety o f commodity and specialty chemical companies make it difficult to rely on relative or absolute costs for ranking companies. We use two measures in addition to information provided by companies to assess cost positions ? ?EBITDA Margin Return on Average Assets How We Measure it for the Grid EBITDA Margin This factor is used in part to gauge the quality of the pricing power a company has and is likely to achieve. It is measured using EBITDA, which includes recurring other income and excludes non-recurring other income and one time charges. This factor, along with several others, is an important measure of a companys profitability in multiple economic scenarios. We use the past three years actual results along with our expectation for the next two years, and to consider the average as well as the high and low points.For illustrative purposes the measurement used in the company examples herein is based on an average of the past three years EBITDA margin. The pickax of EBITDA, versus EB IT, is driven in part by the many and varied depreciation polices used globally and the neediness for comparability between regions. Nonetheless, we recognize the weaknesses of EBITDA, discussed below, and analysts within regions will also evaluate EBIT margins as well. Another reason for the use of EBITDA is the aterial difference in capital intensity within sub-sectors of the chemical industry. The capital intensity of a large commodity company can be very different from a smaller specialty player. The use of EBITDA as opposed to EBIT has a disadvantage in that EBITDA fails to address the capital intensity of the chemical industry effectively. Clearly an important indicator of a companys ability to generate operating profit should be assessed after the costs of plant maintenance and capacity expansion, as represented by its annual depreciation charges.Experience indicates that while a chemical companys capital spending often swings with major projects, it will generally need t o spend its depreciation over time as it maintains and develops new facilities. We attempt to capture the effect of this capital intensity in our use of free cash flow metrics in the financial power rating factor discussion. Return on Average Assets This is a strong measure of a companys ability to generate a reconciled and meaningful return from its asset base. This metric specifically takes into account the capital intensive nature of the industry.This is also a five-year average measurement using the past three years of actual results along with our expectation for the next two years. We use total assets, less cash and short term investments rather than tangible assets to provide a more meaningful measure for the universe of speculative grade companies. Factor 3 Cost Position (18. 18%) Weight a) EBITDA Margin b) ROA EBIT / Assets 9. 09% 9. 09% Aaa ? 30% ? 25% Aa 20% 30% 15% 25% A 15% 20% 10% 15% Baa 10% 15% 7% 10% Ba 8% 10% 4% 7% B 4% 8% 2% 4% Caa 1% 4% 0. 5% 2% Ca 1% 0. 5%A chart that illustrates grid mapping results for Factor 3 and a discussion of outliers for companies in the sample is included in Appendix C. 13 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry Factor 4 Leverage / Financial Policies (18. 18% weight) Why It Matters Managements automaticness to enhance shareholder value via debt financed acquisitions and/or share repurchases, is likely to enlarge credit risk. The chemical industry is particularly vulnerable given its volatile nature.We learn about financial policies through a discussion with management that includes hypothetical scenarios. Such meetings often examine managements willingness to stretch its balance sheet and/or financial flexibility. The hypothetical situations often relate to acquisitions or share repurchase appetites. Concerning acquisitions, discussions often focus on size and on the combination of debt and/or equity that will be used to fund a growth initiative. Another key concern is managements approach to managing financial flexibility through a range of cycles.Specifically we look for an approach that emphasizes preparedness for lean times such that strong cash flows, when available, are used to reduce debt. Measurement of leverage and financial policies is based on two different estimates of leverage current debt to capitalization, and debt to EBITDA. We believe that the amount of leverage with which management operates is a choice and a direct result of a companys financial strategy. Issuers, particularly those in the investment grade and high Ba rating categories, often actively manage to these ratios.Certainly these ratios, especially debt to EBITDA, are used by providers of capital in the form of specific covenant tests. Debt to capital is a simple way to compare the capital structure of companies operating within an industry, and managements often cl aim to manage to it. This metric is also a way to assess managements willingness to grow via debt financed acquisitions. The debt to EBITDA ratio is a measure that balances the debt to capitalization ratio with a measurement of a companys ability to generate EBITDA both in times of peak pricing and in times of stress.We believe these two metrics provide insight into the companys financial policies, including its tolerance for debt and the ability of the company to ride out the highs and low of a cycle. How We Measure it for the Grid Debt to Capital This factor can be easily captured from financial statements using the most recent annual or quarterly debt and equity balances (incorporating our standard adjustments). on that point are certainly situations where this metric becomes less useful particularly in the case of LBOs or spinouts wherein book equity is low or nonexistent. In these instances this metric could be given rock-bottom weight.In the event that a companys book equit y is extremely low and the stock is publicly traded, the analyst may use the market capital of the company in place of book equity in this ratio. While market capital has its own weaknesses and can be very volatile, this approach can be of some value. Debt to EBITDA For this measure we use a five-year average of the annual debt and EBITDA balances as shown on the financial statements. We look back three years and use estimates to make assumptions for two years going forward. Factor 4 Leverage / Financial Policies (18. 18%) * Weight a) Current Debt / Capital b) Debt / EBITDA 9. 09% 9. 09% Aaa lt 15% . 5x Aa 15% 25% . 5x 1. 5x A 25% 35% 1. 5x 2. 25x Baa 35% 50% 2. 25x 3x Ba 50% 70% 3x 4x B 70% 80% 4x 6x Caa 80% 95% 6x 8x Ca ? 95% ? 8x * Where appropriate net adjusted debt may be used (see discussion of Cash Balances and give the sack Debt Considerations) 14 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology M oodys Global Corporate Finance Global Chemical Industry A chart that illustrates grid mapping results for Factor 4 and a discussion of outliers for companies in the sample is included in Appendix C. Factor 5 Financial Strength (27. 7% weight) Why It Matters The three key indicators of financial strength are 1) cheer Coverage, 2) Retained Cash Flow to Debt, and 3) Free Cash Flow to Debt. All of these metrics are averaged over five-year periods to address the volatile nature of the industry. stakes coverage invade coverage can be particularly meaningful for speculative grade companies. This is especially true if the interest rate environment is in a period of change such as the migration from lower rates to higher rates and an issuer is facing the need to refinance debt that is nearing maturity. It is a less important metric for higher-rated companies.The remaining two metrics are useful across the rating spectrum and relate to the amount of cash flow available to cover varied sc enarios of both operating ask and financing needs. ? ? Operating needs include major items such as working capital and capital spending. Financing needs refers to the impact of dividends and the free cash then available to service debt. As discussed above, the use of EBITDA (as opposed to EBIT) in the interest coverage ratio is important for companies in the chemical industry and the decision to use it is a function of the need to make the ratio more comparable globally.Retained Cash Flow and Free Cash Flow The cash flow metrics we use measure two different levels of cash flow retained cash flow and free cash flow and their ratio to total adjusted debt. Retained cash flow is a broader measure of financial flexibility than free cash flow as it excludes the potential noise created by changes in working capital and unusual capital spending programs. This is a reformatory measure given the volatility and the variation in capital intensity within the chemical sector.As with other facto rs in which debt is involved we can look at these cash flow metrics in two ways as a percentage of both debt and of net debt (net of cash balances). We use net debt for companies at which it is either a stated, long-lived policy to hold material cash balances or for which there may be unique scenarios such as recent asset sales whereby cash may be earmarked for use in debt reduction efforts. In some specific instances we may use a net debt denominator for the free cash flow metric as well. A more detailed discussion of our views on cash balances appears below.Free cash flow is, in many instances, one of the most important and reliable measures of financial strength and flexibility. This metric reflects a companys primary source of liquidity as it directly speaks to managements ability to service its debt burden after considering both its operating and financial commitments to shareholders. In this metric we often identify where capital spending programs may be extraordinarily large and/or risky. At times, programs can have a direct impact on ratings because of the size of expenditure that may be involved as well as the risks of executing the program on time and on budget.If, for example, a large amount of capital is spent on new greenfield capacity and we believe that such capacity is being added at a time when product prices are low (i. e. , there is a lack of an adequate return on capital) the ratings may be negatively affected. There is also the risk that anticipated operating cash cost benefits upon project completion are different than expected. 15 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry How We Measure it for the GridInterest coverage This metric is a straightforward look at EBITDA (adjusted for non-recurring other income and one-time charges) to gross interest expense (including capitalized interest). This is a five-year mea sure. Cash Flow to Debt ? Retained Cash Flow to Debt Defined as funds from operations (FFO) minus dividends, as a percentage of total debt. This is a five-year measure. Free Cash Flow to Debt Defined as cash flow from operations (by its nature operating cash flow is determined after taking into account working capital) minus capital spending and dividends, as a percentage of total debt.This is a five-year measure. ? Cash Balances and salary Debt Considerations Typically, analysts approach the use of cash balances and the use of cash in net debt calculations in a conservativist fashion. As a general rule we would not typically consider cash on the balance sheet as a true offset to adjusted total debt in for the purpose of ratio analysis. Reasons that we would not look at cash on the balance sheet as fungible for the debt include concern that ? the cash is easily used for other purposes and debt reduction is only counted hen debt is permanently reduced in some instances cash is ac tually needed to fund the day-to-day operations of the issuer the cash is stranded afield and subject to material taxes such that the true cash balance is materially lower than represented in the financial statements there may be other claims on the cash for restructuring efforts or legacy liabilities. ? ? ? There are, however, examples where our analysis for chemical companies incorporates cash balances as providing a measure of offset to adjusted total debt balances. Exceptions to the above analytical approach, for which we give credit for cash balances include ? he specific re reinforcement of near term debt maturities wherein management borrows in advance to prefund a near term maturity. cash is held temporarily for legal, tax or other purposes and the company has publicly stated its intention to reduce debt once the temporary period has ended. ? Other instances, typically only for large companies, include situations in which management has a history of maintaining material lev els of cash on the balance sheet, it has publicly stated its intention not to pursue largedebt financed acquisitions or share repurchases, and cash is ready to hand(predicate) without meaningful loss to taxes.In Europe and Latin America, we also generally observe that companies are more willing to maintain higher cash balances that may sometimes be linked to tax considerations or more broadly reflect a more conservative style of financial policies. Considering only gross debt may not reflect the real financial strength of these companies and we may prefer in this case to focus on net debt. In these cases, however, we capture the expectation that these cash balances can be liquidated at least at book value and without tax costs.Factor 5 Financial Strength (27. 27%) * Weight a) EBITDA / Interest Expense b) Retained Cash Flow / Debt c) Free Cash Flow / Debt 9. 09% 9. 09% 9. 09% Aaa ? 20x ? 65% ? 40% Aa 15x 20x 45% 65% 25% 40% A 10x 15x 30% 45% 15% 25% Baa 5x 10x 20% 30% 8% 15 % Ba 2x 5x 10% 20% 4% 8% B 1x 2x 5% 10% . 5% 4% Caa 0. 5x 1x 1% 5% 0% . 5% Ca 0. 5x 1% 0% * Where appropriate net adjusted debt may be used (see discussion Cash Balances and Net Debt Considerations) 16 December 2009 ? Rating Methodology ?Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry A chart that illustrates grid mapping results for Factor 5 and a discussion of outliers for companies in the sample is included in Appendix C. Assumptions, Limitations and Rating Considerations not Covered in the Grid The rating methodology grid incorporates a trade-off between simplicity that enhances transparency and greater complexity that would enable the grid to map more closely to actual ratings.The five rating factors in the grid do not constitute an exhaustive treatment of all of the considerations that are important for ratings of global chemical companies. In choosing metrics for this rating meth odology grid, we did not include certain important factors that are common to all companies in any industry, such as the quality and experience of management, assessments of corporate governance and the quality of financial reporting and information disclosure.The assessment of these factors can be highly subjective and ranking them by rating category in a grid would, in some cases, suggest too much precision in the relative ranking of particular issuers against all other issuers that are rated in various industry sectors. Ratings may include additional factors that are difficult to quantify or that only have a meaningful effect in differentiating credit quality in some cases. Such factors include regulatory and litigation risk as well as changes in end use demand such that todays specialty chemical becomes tomorrows commodity.While these are important considerations, it is not possible to precisely express these in the rating methodology grid without making the grid excessively com plex and less transparent. Ratings may also reflect circumstances in which the weighting of a particular factor or qualitative issue will be different from the weighting or outcome suggested by the grid. For example, the importance of the business profile score is highlighted by the fact that, in certain cases, it can outweigh all other factors in the methodology materially, lowering ratings significantly. The three most prominent examples are ? ? operations limited to a single site, and a business model whose success is highly dependent on government actions or policies. a company with significant litigation related to either environmental or product liability issues. This variation in weighting as a rating consideration can also apply to factors that we chose not to attempt to represent in the grid. For example, liquidity is a rating consideration that can sometimes be critical to ratings and under other circumstances may not have a substantial impact in discriminating between two issuers with a similar credit profile.Ratings can be heavily affected by extremely weak liquidity that magnifies indifference risk. However, two identical companies might be rated the same if their only differentiating feature is that one has a good liquidity position while the other has an extremely good liquidity position. This illustrates some of the limitations for using grid-indicated ratings to predict rating outcomes. Another consideration is the increase in pension underfunding that occurred at the end of 2008 as a result of large declines in the global equity markets.Increased pension fund liability is unlikely to be the sole driver of ratings downgrades where issuers have adequate liquidity, sufficient resources to alleviate their funding deficiency over time and financial metric contraction is modest for their rating category and the metric contraction is expected to only temporarily deviate. In evaluating the impact of an issuers pension liability on ratings, the analy st will consider the magnitude of the shortfall, the ability of the company to reduce the shortfall over time using internal sources and committed external sources of capital, and the plans for doing so.Issuers with higher ratings are likely to avoid a downgrade solely resulting from the increased pension liability if there is a clearly articulated plan for reducing the liability and we believe there are resources available to meet the plan without putting the core business and financial profile at risk. Issuers with speculative grade ratings and those at the lower end of investment grade rating levels are at greater risk of ratings transition because of higher potential exposure to liquidity issues and weaker perceived capability of eradicating the funding liability without weakening the companys financial or business position. 7 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry In addition, our ratings incorporate expectations for future performance, while the financial information that is used to illustrate the mapping in the grid is historical in practice we look at a combination of prior years and future years usually three years of history and two years looking forward. In some cases, our expectations for future performance may be informed by confidential information that we cannot publish.In other cases, we estimate future results based upon past performance, industry trends, demand and price outlook, competitor actions and other factors. In either case, predicting the future is subject to the risk of substantial inaccuracy. Assumptions that can cause our forward looking expectations to be preposterous include unanticipated changes in any of the following the macroeconomic environment and general financial market conditions, industry competition, new technology, regulatory actions, and changes in environmental regulation. Conclusion Summary of the Grid-Indicated Rating OutcomesThe methodology grid-indicated ratings based on last twelve month financial data as of the quarter end circumferent to September, 30, 2009 map to current assigned ratings as follows (see Appendix B for the details) ? ? 8 companies map to their assigned rating 10 companies have a grid-indicated rating that is one or two alpha-numeric notches from the assigned rating 2 companies have a grid-indicated rating that is three notches from their assigned rating ? Overall, the framework indicates that there are an even number of companies whose grid-indicated rating is below their actual rating (6) than above their actual rating (6).This can be attributed to a variety of factors including (a) willingness to look through periods of stronger or weaker activity where appropriate (b) grid metrics do not capture our expectation of lower raw material costs and their benefit to margins and (c) liquidity concerns such as generating cash from working cap ital in a downturn are not fully captured by the grid. 18 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical IndustryAppendix A Global Chemical Industry Methodology Factor Grid Weight Factor 1 Business Profile a) Business Position Assessment Factor 2 Size & Stability a) Revenue (Billions of US$) b) of Divisions of Equal Size c) Stability of EBITDA Factor 3 Cost Position a) EBITDA Margin b) ROA EBIT / Assets Factor 4 Leverage / Financial Policies * a) Current Debt / Capital b) Debt / EBITDA Factor 5 Financial Strength * a) EBITDA / Interest Expense b) Retained Cash Flow / Debt c) Free Cash Flow / Debt 9. 09% 9. 09% 27. 28% 9. 09% 9. 09% 9. 09% 18. 19% 9. 09% 9. 09% 18. 9% 9. 09% 9. 09% 27. 28% 9. 09% 9. 09% 9. 09% ? 20. 0x ? 65. 0% ? 40. 0% 15. 0x 20. 0x 45. 0% 65. 0% 25. 0% 40. 0% 10. 0x 15. 0x 30. 0% 45. 0% 15. 0% 25. 0% 5. 0x 10. 0x 20. 0% 30. 0% 8. 0% 15. 0% 2 . 0x 5. 0x 10. 0% 20. 0% 4. 0% 8. 0% 1. 0x 2. 0x 5. 0% 10. 0% 0. 5% 4. 0% 0. 5 1. 0x 1. 0% 5. 0% 0. 0 0. 5% 0. 5x 1. 0% 0. 0% 15. 0% 0. 50x 15. 0% 25. 0% 0. 50x 1. 50x 25. 0% 35. 0% 1. 50x 2. 25x 35. 0% 50. 0% 2. 25x 3. 00x 50. 0% 70. 0% 3. 00x 4. 00x 70. 0% 80. 0% 4. 00x 6. 00x 80. 0% 95. % 6. 00 8. 00x ? 95. 0% ? 8. 00x ? 30. 0% ? 25. 0% 20. 0% 30. 0% 15. 0% 25. 0% 15. 0% 20. 0% 10. 0% 15. 0% 10. 0% 15. 0% 7. 0% 10. 0% 8. 0% 10. 0% 4. 0% 7. 0% 4. 0% 8. 0% 2. 0% 4. 0% 1. 0% 4. 0% 0. 5% 2. 0% 1. 0% 0. 5% ? $50. 0 8 2. 0% $20. 0 $50. 0 6 to 7 2. 0% 6. 0% $10. 0 $20. 0 5 6. 0% 12. 0% $5. 0 $10. 0 4 12. 0% 20. 0% $1. 0 $5. 0 2 or 3 20. 0% 30. 0% $0. 2 1. 0 1 or 2 30. 0% 40. 0% $0. 1 $0. 2 1 40. 0% 60. 0% $0. 1 0. 5 ? 60. 0% ? 6. 0 4. 5 6. 0 3. 5 4. 5 2. 5 3. 5 1. 5 2. 5 0. 1. 5 0. 5 0. 5 0. 5 Aaa Aa A Baa Ba B Caa Ca * Where appropriate net adjusted debt may be used (see discussion Cash Balances and Net Debt Considerations) 19 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating Methodology Moodys Global Corporate Finance Global Chemical Industry Appendix B Methodology Grid-Implied Ratings Overall Grid Implied Rating Issuer Moodys Rating Business Profile Size & Stability of Divisions of Equal Size Baa Aa Aa Aa Aa A A B A Baa Ba Aa Ba B Ba B Caa Ba B Ba Cost PositionLeverage / Financial Policies EBITDA/ Interest Expense (3 Yr) Avg Aaa A A Aaa A Ba Baa Aaa A Baa A A B Ba B Ba B Ba B Ca Financial Strength Retained Cash Flow/ Debt (3 Yr Avg) Aaa A Baa A Ba Ba Ba Aaa A Baa Baa Baa B Ba B Ca Ba Ba Ba Caa Free Cash Flow/ Debt (3 Yr Avg) Ca Baa Ba Ca Ca Ba Ba Aa B B Ba Ba Ca Ba Ba Ca Ba Ca Ba Ca Business Position Assessment Shin-Etsu Chemical Company Ltd BASF (SE) E. I. du Pont de Nemours and Company Revenue (Billions of US$) A Aaa Aa Ba Baa Aa Aa Baa A Baa A Aaa Baa Baa Ba Ba Baa A Ba Baa Stability of EBITDA Baa A Baa Ba Baa A Aa Ca Baa Ba Ba Baa Ba Ba A Baa C a Ba Ba BaEBITDA Margin % (3 Year Avg) Aaa A A Baa Baa A Baa Aaa Baa A Baa Baa A Aa A A Baa Ba B Ba ROA EBIT / Assets (3 Yr Avg) A A A Ba Ba Ba Ba Aaa A A A A Baa A Baa A Baa Ba Ba Ba Current Debt/Capital Aaa Baa Ba A Ba Baa Baa Baa Baa Ba Ba Ba B Caa Caa Caa Ba B Caa Ca Debt/ EBITDA (3 Yr Avg) Aaa Aa Baa A Ba Ba Ba Aa A Baa Baa Baa Ba Ba B B B B B Ca Aa3 A1 A2 A2 A3 A3 Baa1 Baa1 Baa1 Baa2 Baa2 Baa3 Ba1 Ba2 Ba3 Ba3 B1 B1 B1 B3 A1 A1 A3 Baa1 Baa3 Baa1 Baa1 A2 Baa1 Baa2 Baa2 A3 Ba3 Ba1 Ba1 Ba3 B1 Ba3 B1 B2 Aa Aa Aa A Aa Aa A A Ba A Baa Aa B Baa A Baa Ca Baa B Baa Kaneka Corporation Teijin Limited Bayer AG Akzo Nobel N.V. Potash Corporation of Saskatchewan LG Chem, Ltd. Eastman Chemical Company Yara International ASA Dow Chemical Company (The) Braskem SA Celanese Corporation Nalco Company ISP Chemco LLC NOVA Chemicals Corporation Huntsman Corporation PolyOne Corporation Hexion Specialty Chemicals Inc. Positive Outlier Negative Outlier For illustrative purposes most financial metrics u sed the last three full fiscal years of reported data FYs 2006, 2007 and 2008 20 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating MethodologyMoodys Global Corporate Finance Global Chemical Industry Appendix C Observations and Outliers for Grid Mapping Factor 1 Business Profile The majority of positive outliers for business profile are associated with companies whose financial strength, financial policy measures or liquidity are weakly positioned, providing offsets that are more consistent with the overall ratings. Factor 1 Business Profile Issuer Shin-Etsu Chemical Company Ltd BASF (SE) E. I. du Pont de Nemours and Company Kaneka Corporation Teijin Limited Bayer AG Akzo Nobel N. V. Potash Corporation of Saskatchewan Inc.LG Chem, Ltd. Eastman Chemical Company Yara International ASA Dow Chemical Company (The) Braskem SA Celanese Corporation Nalco Company ISP Chemco LLC NOVA Chemicals Corporation Huntsman Corporation PolyOne Corpora tion Hexion Specialty Chemicals Inc. Positive Outlier Rating Aa3 A1 A2 A2 A3 A3 Baa1 Baa1 Baa1 Baa2 Baa2 Baa3 Ba1 Ba2 Ba3 Ba3 B1 B1 B1 B3 Business Position Assessment Aa Aa Aa A Aa Aa A A Ba A Baa Aa B Baa A Baa Ca Baa B Baa Negative Outlier 21 December 2009 ? Rating Methodology ? Moodys Global Corporate Finance Global Chemical Industry Rating MethodologyMoodys Global Corporate Finance Global Chemical Industry Factor 2 Size & Stability present the majority of positive outliers for revenue are associated with companies whose financial strength, financial policy measures or liquidity are relatively weakly positioned, providing offsets that are more consistent with the overall ratings. The negative outliers are largely related to the stability of EBITDA metric and reflect the volatility of cash flows in certain companies and sectors due to unprecedented high raw material prices and the significant global economic downturn in 2008.Factor 2 Size & Stability Revenue (Billions of US$) A Aaa Aa Ba Baa Aa Aa Baa A Baa A Aaa Baa Baa Ba Ba Baa A Ba Baa Issuer Shin-Etsu Chemical Company Ltd BASF (SE) E. I. du Pont de Nemours and Company Rating Aa3 A1 A2 A2 A3 A3 Baa1 Baa1 Baa1 Baa2 Baa2 Baa3 Ba1 Ba2 Ba3 Ba3 B1 B1 B1 B3 of Divisions of Equal Size Baa Aa Aa Aa Aa A A B A Baa Ba Aa Ba B Ba B Caa Ba B Ba Stability of EBITDA Baa A Baa Ba Baa A Aa Ca Baa Ba Ba Baa Ba Ba A Baa Ca Ba Ba Ba Kaneka Corporation Teijin Limited Bayer AG Akzo Nobel N. V. Potash Corporation of Saskatchewan Inc. LG Chem, Ltd.Eastman Chemical Company Yara International ASA Dow Chemical Company (The) Braskem SA Celanese Corporation Nalco Company ISP Chemco LLC NOVA Chemicals Corporation Huntsman Corporation PolyOne Corporation Hexion Specialty Chemicals Inc. Positive Outlier Negative Outlier 22 December 2009 ? Rating