Chemical Industry Credit Quality Deteriorates while Refinancing Risk Rises
THE SUDDEN collapse of LyondellBasell under the crushing weight of $26bn (€19.7bn) of debt, made heavier by the severe global economic downturn, was the first big domino to fall.
The chemical industry can expect more bankruptcies to take place in 2009, as credit quality deteriorates and refinancing options remain scarce.
After years of frenetic mergers and acquisition (M&A) activity, leveraged buyouts (LBOs) and share buybacks, the North American chemical industry is much more highly leveraged, compared with previous downturns. "Relative to prior downturns, there are many more high-yield companies in North America, so there are bound to be more bankruptcies," says John Rogers, head of the chemical group at US credit ratings agency Moody's Investors Service.
Out of 75 North American chemical companies covered by Moody's, 54, or 72%, are in the high-yield (elevated leverage) category - more than double the 26 at the end of 2001.
Out of 69 North American chemical companies covered by US credit ratings agency Standard & Poor's (S&P), 43, or 62% of the group, are in the "junk" category. And 32 have ratings in the "B+" to "CCC-" level, indicating very high leverage, according to Kyle Loughlin, team leader of the chemical group at S&P.
That compares with 32 out of 71, or 45% of chemical companies in the junk category at the beginning of 2000, and only 14 rated in the "B+" to "CCC-" categories.
"The whole phenomenon of LBOs, M&A activity and share repurchases in past years caused a tremendous uptick in highly leveraged companies going into this downturn," says Loughlin.
It is different this time around - and not in a good way. The industry faces a double whammy. Not only are business fundamentals deteriorating, but now with the credit markets out of commission, some companies may not be able to refinance their debt.
"What's worse, this downcycle compared to the 2001-2003 timeframe is that the credit markets are complicating issues around liquidity and refinancing risk," says Loughlin.
"In the past downcycle, companies like Lyondell Chemical were able to negotiate flexibility related to financial covenants and have access to credit, despite the fact that credit metrics had deteriorated significantly through the bottom of the cycle."
Today, speculative-grade (those rated "BB+" and below - also known as "junk") companies may find it difficult to secure the financial flexibility needed to ride out the trough. Many will be under high pressure to refinance in 2009 under extremely difficult market conditions.
Companies in the "B+" to "CCC-" categories are exposed to higher default risk, particularly in this very constrained credit environment, according to Loughlin.
ASSUME NOTHING
"You cannot assume that companies in the speculative grade facing near-term debt maturities will have access to the capital markets in order to term out debt," he says.
"There are several companies that are very stressed and that will need to refinance or seek waivers to their credit agreements over the next 12 months. These include Aventine Renewable Energy, Georgia Gulf, Kraton Polymers, Omnova Solutions, Chemtura and Arclin," says Rogers.
US specialty chemical firm Chemtura and Canada's NOVA Chemicals face big upcoming debt maturities in 2009.
On January 22, S&P downgraded Chemtura's ratings by three notches from "B" to "CCC" with a negative outlook.
"The downgrade reflects the company's stressed liquidity position, following recent negotiations with its lenders, and heightened concerns regarding Chemtura's upcoming debt maturity on its $370m 7% notes on July 15, 2009, in light of the increasingly challenging operating and credit market environment," said S&P.
In December 2008, Chemtura had negotiated flexibility with its lenders, obtaining a 90-day waiver on its covenants on its senior credit facility through March 30. However, the company's credit facility was cut back from $740m to $500m.
"That sharply curtailed available liquidity for the company," says Loughlin.
In addition, during the 90-day waiver period, Chemtura's borrowings under the credit facility may not exceed $195m through the end of January, and not exceed $190m from February through March 30.
On January 23, shares of Chemtura plunged by $0.20, or 24.4%, to an all-time low of $0.62 per share. Equity investors are fearing the company may go bankrupt.
On January 22, S&P also put NOVA Chemicals' "B+" rating on CreditWatch with negative implications.
"The CreditWatch action reflects our concerns about the company's tightening liquidity in 2009 due to upcoming debt maturities and lower cash flow generation, as well as heightened risk of covenant violations later in the year," said S&P.
NOVA has $376m in debt maturing this year, including $250m in bonds on April 1 and $126m in preferred stock maturing on October 31, noted S&P.
However, S&P said it believed NOVA had sufficient liquidity to pay down debt. At the end of 2008, the company had $575m in liquidity, mostly available under credit facilities.
UK-based petrochemical giant INEOS was downgraded by two notches by S&P on January 23, from "B-" to "CCC."
"This reflects the unprecedented weak market conditions for petrochemical companies in the fourth quarter of 2008 and the weak outlook for 2009, which could result in severe liquidity pressure for INEOS as a result of its highly leveraged financial structure," said S&P. INEOS will have to renegotiate with its lenders in April to obtain a longer-term covenant framework for its debt, according to S&P.
FOAMEX DEFLATED
On January 23, US-based foam products maker Foamex defaulted on a $7.3m interest payment and is now negotiating with lenders. Netherlands-headquartered chemical company LyondellBasell and US-based titanium dioxide producer Tronox filed for bankruptcy earlier in January.
Other companies that will be stressed but unlikely to go bankrupt include Dow Chemical, Ferro, Avery Dennison, Huntsman, Hexion, Momentive Performance Materials, Solutia, NOVA Chemicals and Ashland, according to Rogers. "People are looking at chemicals differently now. I think the high-yield market may be more difficult for chemicals than other sectors like oil and the consumer sector," he says. "There is so much uncertainty over chemical earnings throughout 2009 - how low we go, and what the future prospects will look like."
Further bankruptcies in the chemical sector could create a domino effect, hurting the ability of other highly leveraged companies to refinance as lenders flee the sector.
On the bright side, the financing window is still open for investment-grade companies, although refinancing will come at a high price. On January 23, US-based specialty chemical firm Lubrizol (rated "BBB" by S&P) announced the sale of $500m in 10-year notes yielding 8.875%. Proceeds will be used to pay down its 4.625% notes due in October 2009.
"Companies that have preserved investment-grade capital structures and appropriate debt maturity profiles are being rewarded for that," says Loughlin
The chemical industry can expect more bankruptcies to take place in 2009, as credit quality deteriorates and refinancing options remain scarce.
After years of frenetic mergers and acquisition (M&A) activity, leveraged buyouts (LBOs) and share buybacks, the North American chemical industry is much more highly leveraged, compared with previous downturns. "Relative to prior downturns, there are many more high-yield companies in North America, so there are bound to be more bankruptcies," says John Rogers, head of the chemical group at US credit ratings agency Moody's Investors Service.
Out of 75 North American chemical companies covered by Moody's, 54, or 72%, are in the high-yield (elevated leverage) category - more than double the 26 at the end of 2001.
Out of 69 North American chemical companies covered by US credit ratings agency Standard & Poor's (S&P), 43, or 62% of the group, are in the "junk" category. And 32 have ratings in the "B+" to "CCC-" level, indicating very high leverage, according to Kyle Loughlin, team leader of the chemical group at S&P.
That compares with 32 out of 71, or 45% of chemical companies in the junk category at the beginning of 2000, and only 14 rated in the "B+" to "CCC-" categories.
"The whole phenomenon of LBOs, M&A activity and share repurchases in past years caused a tremendous uptick in highly leveraged companies going into this downturn," says Loughlin.
It is different this time around - and not in a good way. The industry faces a double whammy. Not only are business fundamentals deteriorating, but now with the credit markets out of commission, some companies may not be able to refinance their debt.
"What's worse, this downcycle compared to the 2001-2003 timeframe is that the credit markets are complicating issues around liquidity and refinancing risk," says Loughlin.
"In the past downcycle, companies like Lyondell Chemical were able to negotiate flexibility related to financial covenants and have access to credit, despite the fact that credit metrics had deteriorated significantly through the bottom of the cycle."
Today, speculative-grade (those rated "BB+" and below - also known as "junk") companies may find it difficult to secure the financial flexibility needed to ride out the trough. Many will be under high pressure to refinance in 2009 under extremely difficult market conditions.
Companies in the "B+" to "CCC-" categories are exposed to higher default risk, particularly in this very constrained credit environment, according to Loughlin.
ASSUME NOTHING
"You cannot assume that companies in the speculative grade facing near-term debt maturities will have access to the capital markets in order to term out debt," he says.
"There are several companies that are very stressed and that will need to refinance or seek waivers to their credit agreements over the next 12 months. These include Aventine Renewable Energy, Georgia Gulf, Kraton Polymers, Omnova Solutions, Chemtura and Arclin," says Rogers.
US specialty chemical firm Chemtura and Canada's NOVA Chemicals face big upcoming debt maturities in 2009.
On January 22, S&P downgraded Chemtura's ratings by three notches from "B" to "CCC" with a negative outlook.
"The downgrade reflects the company's stressed liquidity position, following recent negotiations with its lenders, and heightened concerns regarding Chemtura's upcoming debt maturity on its $370m 7% notes on July 15, 2009, in light of the increasingly challenging operating and credit market environment," said S&P.
In December 2008, Chemtura had negotiated flexibility with its lenders, obtaining a 90-day waiver on its covenants on its senior credit facility through March 30. However, the company's credit facility was cut back from $740m to $500m.
"That sharply curtailed available liquidity for the company," says Loughlin.
In addition, during the 90-day waiver period, Chemtura's borrowings under the credit facility may not exceed $195m through the end of January, and not exceed $190m from February through March 30.
On January 23, shares of Chemtura plunged by $0.20, or 24.4%, to an all-time low of $0.62 per share. Equity investors are fearing the company may go bankrupt.
On January 22, S&P also put NOVA Chemicals' "B+" rating on CreditWatch with negative implications.
"The CreditWatch action reflects our concerns about the company's tightening liquidity in 2009 due to upcoming debt maturities and lower cash flow generation, as well as heightened risk of covenant violations later in the year," said S&P.
NOVA has $376m in debt maturing this year, including $250m in bonds on April 1 and $126m in preferred stock maturing on October 31, noted S&P.
However, S&P said it believed NOVA had sufficient liquidity to pay down debt. At the end of 2008, the company had $575m in liquidity, mostly available under credit facilities.
UK-based petrochemical giant INEOS was downgraded by two notches by S&P on January 23, from "B-" to "CCC."
"This reflects the unprecedented weak market conditions for petrochemical companies in the fourth quarter of 2008 and the weak outlook for 2009, which could result in severe liquidity pressure for INEOS as a result of its highly leveraged financial structure," said S&P. INEOS will have to renegotiate with its lenders in April to obtain a longer-term covenant framework for its debt, according to S&P.
FOAMEX DEFLATED
On January 23, US-based foam products maker Foamex defaulted on a $7.3m interest payment and is now negotiating with lenders. Netherlands-headquartered chemical company LyondellBasell and US-based titanium dioxide producer Tronox filed for bankruptcy earlier in January.
Other companies that will be stressed but unlikely to go bankrupt include Dow Chemical, Ferro, Avery Dennison, Huntsman, Hexion, Momentive Performance Materials, Solutia, NOVA Chemicals and Ashland, according to Rogers. "People are looking at chemicals differently now. I think the high-yield market may be more difficult for chemicals than other sectors like oil and the consumer sector," he says. "There is so much uncertainty over chemical earnings throughout 2009 - how low we go, and what the future prospects will look like."
Further bankruptcies in the chemical sector could create a domino effect, hurting the ability of other highly leveraged companies to refinance as lenders flee the sector.
On the bright side, the financing window is still open for investment-grade companies, although refinancing will come at a high price. On January 23, US-based specialty chemical firm Lubrizol (rated "BBB" by S&P) announced the sale of $500m in 10-year notes yielding 8.875%. Proceeds will be used to pay down its 4.625% notes due in October 2009.
"Companies that have preserved investment-grade capital structures and appropriate debt maturity profiles are being rewarded for that," says Loughlin
CHEMICAL DEBT TRADING AT "ABSURD LEVELS"
Certain debt securities in the North American chemical industry are trading at "absurd levels," Moody's Investors Service analyst John Rogers says. "There is a lot of chemical industry debt that is trading at [absurdly low] levels," he says.
One example is the $250m (€190m) in debt of NOVA Chemicals maturing in April, which is trading near 85 (85% of $1,000 par value), says Rogers. "The implied annualized interest rate of that issue is over 100%."
If NOVA is able to repay that debt upon maturity on April 15, bondholders will receive full value - 100 cents on the dollar. If it is unable to make the payment and defaults, look out below.
"NOVA will likely get support from the Canadian banks," says Rogers.
Moody's has a "Ba3" (equivalent to an S&P rating of "BB-") rating on NOVA with a negative outlook.
"Also, Hexion Specialty Chemical's debt is trading in the teens, which means investors are basically saying the company is bankrupt. That seems pretty severe," says Rogers.
Moody's has a "B2" (equivalent to an S&P rating of "B-") rating on Hexion with a negative outlook.
For bold investors willing to take a chance, trawling for deals in the junk bond market might make sense now when fear rules the roost. While stockholders of distressed companies may wind up with nothing, investors who buy bonds for cents on the dollar can still reap rich rewards.
RECENT CREDIT RATINGS ACTIONS
Source: Moody's, Standard & Poor's
- 1/15/2009, Kronos, Moody's lowers rating from "B2" to "B1"
- 1/22/2009, Chemtura, S&P lowers rating from "B" to "CCC"
- 1/22/2009, NOVA Chemicals, S&P puts "B+" rating
- 1/23/2009, INEOS Group, S&P lowers rating from "B-" to "CCC"
- 1/23/2009, Foamex, S&P lowers rating from "CCC+" to "D"
- 1/28/2009, Hexion Spec Chem, S&P lowers rating from "B-" to "CCC+"
source: www.ICIS.com
