EXHIBIT E
LETTERS BETWEEN SAMUEL HEYMAN AND
WILLIAM JOYCE
December 18, 2001
January 8, 2002
January 22, 2002
[ISP LOGO]
INTERNATIONAL SPECIALTY PRODUCTS
667 MADISON AVENUE, 12TH FLOOR, NEW YORK, NEW YORK 10021
SAMUEL J. HEYMAN
CHAIRMAN OF THE BOARD
TEL. (212) 821-1601
FAX: (212) 821-1605
December 18, 2001
William H. Joyce, Ph.D., Chairman and
Chief Executive Officer
Hercules Incorporated, Hercules Plaza
1313 North Market Street
Wilmington, DE 19898
Dear Bill:
I am in receipt of your December 11th letter.
Bill, my colleagues and I have worked very hard as Hercules Board members
to provide you and the Board with the soundest business advice that we can. ONLY
AFTER MONTHS OF DISCUSSION WITH RESPECT TO A CRITICALLY IMPORTANT POINT
AFFECTING THE COMPANY'S ENTIRE RESTRUCTURING STRATEGY, WAS I ABLE TO PERSUADE
YOU THAT HERCULES' DEBT CAN IN FACT BE REFINANCED. Only recently, I offered to
be helpful to you in connection with the Company's financing efforts and to make
Susan Yoss available as well. Notwithstanding, on the theory I guess that no
good deed goes unpunished, I continue to receive these unproductive responses
from you.
I do not intend to waste time on a point-by-point rebuttal of your letter
(in which you incorrectly imply, by way of just one example, that I had earlier
supported a valuation of BetzDearborn in the $1-1.1 billion range while
deliberately omitting reference to my July 9th letter which makes clear that the
opposite was true. "While the report is limited of course by the amount of
information the author had access to, and I CERTAINLY DO NOT SUBSCRIBE TO
EVERYTHING IN IT--VALUATIONS, FOR EXAMPLE (emphasis added)...")
And I do not understand why you continue to harp on the potential sale to a
financial buyer of a partial interest in BetzDearborn. Given the fact that a
refinancing on attractive terms is available to us on a straight debt basis, why
sell equity at a discounted price and encumber the Company's major asset which
will only complicate a subsequent sale of our remaining share of the
BetzDearborn business?
As to the principal point in your letter, I do in fact revise my thinking
when material facts change--don't you? For example, while in the first 60 days
of my service on the Board I indicated that I was supportive of a sale of
BetzDearborn at certain prices
were you able to achieve them, my conclusion was based on the unanimous advice
of the Company's investment bankers and management that the Hercules debt was
not refinancible. When in August, after having done our own analysis into the
strength of the institutional bank and high yield markets and as a result of our
expectations of significantly higher cost take outs, I concluded that the
Company's debt was in fact refinancible, I accordingly urged you and the Board
at the August Board meeting and in a subsequent Board call in September to take
the "For Sale" signs down and proceed with the refinancing.
Moreover, the case for retention of BetzDearborn became even stronger when
we learned at our October Board meeting that the Company was predicting a
substantial increase in EBITDA for BetzDearborn in 2002--for which we obviously
would not be paid in a sale now. Incidentally, it would have been helpful to
have been provided these projections at an earlier time so that the Board could
have been in a position to evaluate the advisability of continuing the sale
process and/or position our negotiations with GE. In the same vein, although I
have asked for these on a number of occasions, the Board has still yet to
receive 5-year projections for our businesses, although Goldman Sachs referred
to 10-year projections in their recent presentation. As you remember, I
requested this information in my December 6th letter and again it would have
been helpful to have been provided this data in connection with our recent
deliberations.
Bill, our challenge is not so much keeping our options open but rather
making them viable alternatives. After months of discussion, last week's
decision of the Board and yourself to authorize Stuart Shears to have the
investment bankers complete their due diligence, negotiate definitive terms of a
refinancing and take whatever other action necessary to enable the Company to be
in a position to launch a refinancing right after the first of the year is an
excellent first step.
All the best,
Sincerely,
/s/ Samuel J. Heyman
SJH: kjc
cc: HERCULES INC. BOARD OF DIRECTORS
--------------------------------
John G. Drosdick
Richard Fairbanks
Alan R. Hirsig
Edith E. Holiday
Robert Kennedy
Sunil Kumar
Jeffrey M. Lipton
Peter McCausland
Gloria Schaffer
Paula A. Sneed
Raymond S. Troubh
Joe B. Wyatt
[ISP LOGO]
INTERNATIONAL SPECIALTY PRODUCTS
667 MADISON AVENUE, 12TH FLOOR, NEW YORK, NEW YORK 10021
SAMUEL J. HEYMAN
CHAIRMAN OF THE BOARD
TEL. (212) 821-1601
FAX: (212) 821-1605
January 8, 2002
William H. Joyce, Ph.D., Chairman and
Chief Executive Officer
Hercules Incorporated, Hercules Plaza
1313 North Market Street
Wilmington, DE 19898
Dear Bill:
I am deeply concerned about our call last week in which you indicated that
the Company's refinancing plans have been deferred until its fourth quarter
financials are completed. This is absolutely contrary to the clear understanding
reached at our December Board meeting, as summarized in my December 18th letter,
as follows: "...last week's decision of the Board and yourself to authorize
Stuart Shears to have the investment bankers complete their due diligence,
negotiate definitive terms of a refinancing and take whatever other action
necessary to enable the Company to be in a position to launch a refinancing
right after the first of the year...".
Bill, the refinancing alternative is still the best course for Hercules,
the hi-yield market continues to be extremely receptive but can be highly
volatile as well, and we ought to promptly take advantage of the opportunity we
have. In this connection, I am enclosing a December 17th article from the
CHEMICAL MARKET REPORTER which points to the fact that a "growing number of
chemicals companies" are taking advantage of the financing markets to replace a
substantial portion of their short-term bank debt with long-term debt, as we
have of course recommended for some time now.
All the best,
/s/ Samuel J. Heyman
SJH: kjc
enclosure
cc: HERCULES INC. BOARD OF DIRECTORS
--------------------------------
John G. Drosdick
Richard Fairbanks
Alan R. Hirsig
Edith E. Holiday
Robert Kennedy
Sunil Kumar
Jeffrey M. Lipton
Peter McCausland
Gloria Schaffer
Paula A. Sneed
Raymond S. Troubh
Joe B. Wyatt
December 17, 2001 | CHEMICAL MARKET REPORTER
Chemical Industry Debt Issuance Surges as Banks Turn Up the Heat
Nearly $2 billion in long-term debt issued or in the pipeline in December,
JOSEPH CHANG reports.
PRESSURED BY banks to reduce short-term debt in a hostile operating environment,
a growing number of chemical companies are issuing substantial amounts of
long-term debt in the credit markets. While companies with strong balance sheets
have been able to get good rates on long-term debt, many in the near investment
grade and lower credit categories have been unable to take advantage of record
low interest rates as risk premiums have risen substantially.
Just in December alone, there has been over $2.1 billion in long-term debt
issued or being offered in the US chemical industry from companies such as
Ferro, International Specialty Products, OM Group, Dow Chemical, Lyondell and
Olin. Through the first three quarters of 2001, US chemical companies have
issued $6.3 billion in debt versus just $3.2 billion for all of 2000, according
to Young & Partners, a New York City-based investment bank.
While part of the surge in debt issuance is being driven by lower interest
rates, pressure from banks to reduce short-term debt also plays a significant
role.
"Interest rates are lower, so companies are taking advantage of that, and
in some cases, companies are trying to extend their debt maturities," says
Standard & Poor's chemicals analyst Peter Kelly. "In other cases, it's to take
out some bank debt to release the pressure from the banks and get covenant
relief."
[GRAPHIC]
"There's a lot of pressure from the banks on companies to reduce their bank
exposure and increase their public market debt," says Moody's Investors Service
chemicals analyst John Rogers. "Companies that see a window of opportunity are
taking it."
Another factor in the surge of debt issuance is the relentless string of
credit downgrades in the chemical industry (CMR, 12/3/01, page 1). Companies are
seeking to raise funds or refinance sooner rather than later in the face of
further potential credit deterioration.
Despite historically low US Treasury rates stemming from 11 consecutive
interest rate cuts by the Federal Reserve in less than a year, chemical
companies in the borderline investment-grade category and high yield areas are
seeing interest rates on their new debt issues rise to unusually high levels.
"Most of the chemical industry is in the area of Baa (Moody's investment
grade) and below, and the spreads (over the Treasury rate) there are unusually
wide right now," Mr. Rogers points out. "Spreads are as high as 400+ basis
points (4 percentage points and higher), where typically you'd be looking at 250
to 300 basis points max. So rates for even a Baa issuer are around 8 to 9
percent, which are a little high on a long-term basis."
For example, investment-grade issuer Olin Corp. sold $200 million in
10-year senior notes on December 6. While Olin is rated BBB by S&P and Baa3 by
Moody's, the company sold the debt with a 9.125 percent interest rate,
representing a 415 basis point spread over the 10-year Treasury note. Proceeds
are being used to repay existing indebtedness.
Lyondell Chemical Company, which is rated somewhat below investment grade
at BB- (S&P) and Ba3 (Moody's), sold $393 million of seven-year senior secured
notes at 9.5 percent on December 4. Proceeds are being used to repay around $384
million of the $1 billion Lyondell has in outstanding term loans on its credit
facility.
[GRAPHIC]
IMC Global Inc., with ratings of BB (S&P) and Ba2 (Moody's), went to the
market in early October to sell $100 million in seven-year senior unsecured
debt. The yield-to-maturity on those notes was 11 percent, notes Moody's Mr.
Rogers.
On the other end, chemical companies with strong credit ratings have been
able to sell debt on very favorable terms. The Dow Chemical Company, with an A
rating from S&P, sold $500 million in seven-year global notes on December 6 with
an interest rate of 5.75 percent. The spread was just 98 basis points over US
Treasuries.
"For companies like Dow and DuPont who have strong credit ratings, this is
an opportunistic time to issue debt because the spreads are reasonable," notes
Mr. Rogers. "If you're in the A range or above and are a well known issuer, you
can come to market fairly cheaply."
[HERCULES LOGO]
Hercules Incorporated
Hercules Plaza
1313 North Market Street
Wilmington, DE 19894-0001
January 22, 2002 (302) 594-6802
Fax: (302) 594-6800
Email: wjoyce@herc.com
William H. Joyce
Chairman and
Chief Executive Officer
VIA FACSIMILE: 212-821-1605
Mr. Samuel J. Heyman
Chairman of the Board
International Specialty Products
667 Madison Avenue, 12th floor
New York, NY 10021
Dear Sam:
I have received your January 8, 2002 letter, which references your earlier
letter of December 18, 2001. It is obvious that you and I have a different
understanding concerning the steps that are being taken to prepare the Company
for a refinancing should the Board select that option from among those
available. In fact, the Company is continuing to explore and refine all of the
options discussed at our last Board meeting. These include significant
negotiations for the sale of BetzDearborn, which appear to be rapidly
approaching conclusion, exploration of joint venture alternatives, and
preparations for a possible refinancing. Our intention is to be as prepared as
we can be to implement any strategic decision that is made by the Board while,
at the same time, trying to avoid undue expenditures. FOR EXAMPLE, IN CONNECTION
WITH THE REFINANCING ALTERNATIVE, WE HAVE EVALUATED DETAILED FINANCING PROPOSALS
FROM VARIOUS INSTITUTIONS AND HAVE SELECTED THE UNDERWRITING GROUP, WITH THE
INAUGURAL MEETING SCHEDULED FOR TOMORROW IN WILMINGTON. WE DO NOT INTEND,
HOWEVER, TO SIGN ANY UNDERWRITING COMMITMENTS UNLESS AND UNTIL THE BOARD CHOOSES
THE REFINANCING ALTERNATIVE. In the interim, I believe we should proceed
diligently to prepare for a refinancing so that we may be poised to finalize
arrangements and complete a financing transaction at the earliest possible time
in the event the Board should choose that alternative.
With respect to your December 18 letter, you stated that you did not intend
to waste time on a point-to-point rebuttal of my December 11 letter. In keeping
with that spirit, I will not waste time on a point-by-point rebuttal of your
letter and will limit my response to one of the comments contained in your
letter; specifically, your comment in the very first paragraph of your December
18 letter stating, "ONLY AFTER MONTHS OF
Mr. Samuel J. Heyman
January 22, 2002
Page 2
DISCUSSION WITH RESPECT TO A CRITICALLY IMPORTANT POINT AFFECTING THE COMPANY'S
ENTIRE RESTRUCTURING STRATEGY, WAS I ABLE TO PERSUADE YOU THAT HERCULES' DEBT
CAN IN FACT BE REFINANCED". SAM, WE HAVE COVERED THIS ARGUMENT MANY TIMES
BEFORE. I CHANGED MY POSITION BECAUSE THE FACTS CHANGED, NOT BECAUSE YOU
PERSUADED ME THAT YOUR PRIOR POSITION WAS CORRECT. IN FACT, THE COMPANY'S DEBT
CAN NOW BE REFINANCED BECAUSE THE COMPANY'S COST REDUCTION EFFORTS, COMBINED
WITH A MAJOR CHANGE IN THE CREDIT MARKETS, MADE REFINANCING A FEASIBLE
ALTERNATIVE, WHEREAS IT WAS NOT PREVIOUSLY FEASIBLE.
I will also not attempt to respond on a point-by-point basis to your
December 26 letter and its enclosure. I will, however, state for the record that
I do not believe the Company's analysis is "just plain wrong in some respects as
pointed out by the enclosed", nor that it "makes the most pessimistic
assumptions possible with regard to other areas". Nor do I acknowledge that "the
sales process was handled poorly by my predecessor," or that your
characterizations of his expectations or attitude are correct.
Sincerely,
/s/ William H. Joyce
William H. Joyce
cc: Hercules Board of Directors