Rhodia gains breathing space but faces tough first half

29 December 2003 16:00  [Source: ICIS news]

Recent welcome news from Rhodia is clouded by the group’s underlying problems. Worker unrest notwithstanding, the company has to move ahead quickly with its disposal programme and focus more clearly. Rhodia needs a solid core and a strategic plan related to that core that can convince customers, investors and workers alike.

The plan has to be adaptable as well as sustainable. A major hurdle has been overcome and it is good to see that much of the refinancing issue has been largely cleared from the table before the start of 2004. Some say that the storm appears to be passing but attention now will be focused on the restructuring (for which there will be costs as well as gains) and hopefully improved business performance.

Yet, Rhodia waits, as every other company in chemicals does, for better times. The company’s banks have been convinced that the new management strategy is worth backing but it is results that count.

The news on 23 December was good and bad. The re-stated results for the third quarter (which took the net loss for the first nine months of 2003 to more than Euro1bn ($1.25bn)) sent out the message that those three months marked the pit of the downturn. However, Rhodia went out of its way in its press statement to talk about the continuing deterioration in market conditions from which its also announced Euro875m asset write-down sprang. Rhodia is called a specialty chemical company but large parts of its business are closely linked to the high and burdensome oil price.

Credit rating agency Standard & Poor’s (S&P) picked up on these themes just before the start of the holiday season when it downgraded Rhodia’s credit ratings. The main reasoning behind the downgrade (Rhodia’s long-term credit rating was cut to “B” from “BB-“ and the company placed on CreditWatch with negative implications) was increased concern about an “anticipated dramatic decrease in the group’s cash balance”. US bond holders need paying and new credit facilities will not be available until the middle of 2004. Free cash flow, already under pressure, will be hit further by restructuring expenses and a possible deterioration in working capital.

Undoubtedly, the next six months will be tough for the company. The financial fix is short term and so much now relies on the Euros300m capital increase being considered for the first half of 2004 and the planned Euros700m of asset disposals. Three business units have been earmarked for sale but the programme cannot be expected to yield results much before the second half.

It has to be remembered that over the first nine months of this year volumes contracted rather than expanded for Rhodia and prices were flat. The third quarter was particularly bad with volumes dropping by 4.6% compared with the year earlier period. Given steady pricing, net sales fell 19%.

Rhodia needs the market upturn as much as it needs lower raw material costs and to restructure fast. It will be one of the first chemical companies to report on 2003 (on 29 January 2004 when Rhodia watchers will be keenly looking for a restructuring as well as a financial update).

All Rhodia said officially towards the end of December was that the current action plan is being pursued. As well as addressing medium-term bank financing that focuses on simplifying and streamlining the company – to achieve cost savings of Euros165m – and the Euro700m disposal programme. These latter two actions “are progressing in a satisfactory manner”, the company said.

By: Nigel Davis
+44 20 8652 3214

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