KCC’s finances strained as US unit struggles

KCC Corp. is facing financial difficulties following the acquisition of the U.S.-based silicone company Momentive Performance Materials, with deteriorating performance of the subsidy amid increased debt from the merger and acquisition, potentially leading to severe capital pressure next year, according to industry officials, Thursday.

KCC Corp. is a holding company of KCC Group, a conglomerate engaged in construction materials, flooring materials, silicone, glasses and construction businesses. In 2019, the company formed a consortium with a private equity firm and other partners and acquired Momentive for $3.1 billion.

After the acquisition, Momentive served as a key cash cow for KCC for several years. However, KCC is now struggling with deteriorated silicone business recently, caused by rising raw material prices and worsening funding conditions due to high-interest rates.

KCC has relied on borrowings for more than half of the acquisition price of Momentive, which has led to a significant increase in its debt. In 2020, a year after the acquisition when Momentive’s performance and the acquisition finance borrowing began being included in the balance sheet of KCC, the company’s total borrowings surged from 2 trillion won ($1.55 billion) to 4.4 trillion won.

Though the debt more than doubled, it was not a burden considering Momentive’s good performance in the global silicon market. However, uncertainties in the supply chain due to the Russia-Ukraine war affected the silicon raw material market, raising the prices of metal silicone and methanol. Due to this unfavorable condition, Momentive, KCC’s silicon business unit, recorded an operating profit of 13.2 billion won in the first quarter of this year but posted operating losses of 16 billion won and 38.3 billion won in the second and third quarters, respectively.

Due to the poor performance of the silicone business, KCC’s cash flow worsened and the company filled the gap with short-term borrowing, which led to an increase in the size of its debt, reaching 5.48 trillion won at the end of the third quarter.

KCC overcoming this financial difficulty is dependent on the success of Momentive’s initial public offering (IPO) on the New York Stock Exchange. IPO preparations are underway for a listing in the first half of 2024. However, concerns remain that the silicone unit may be undervalued before the listing due to expected losses in the fourth quarter.

“Currently, the IPO of Momentive is being pushed for listing on the New York Stock Exchange targeting May 2024, and three overseas underwriters have been selected and the process is underway. If the IPO is successful, the primary goal is to resolve the acquisition financing issued at the time of the acquisition,” Chung Kyung-hee, an analyst at Kiwoom Securities, said.

The analyst also predicted that there is room for Momentive’s performance to be resolved.

“Despite the current downward trend of metal silicone, we see a prolonged period of high-priced raw material lagging due to contracts signed at a time when raw materials rose sharply,” Chung said. “Once the contracts of high-priced raw materials are gone, the silicone business is expected to have an additional profit improvement after 2024.”