Credit crunch not the end to financing

27 June 2008 21:34  [Source: ICIS news]

BANGKOK (ICIS news)--Despite a global credit crunch, financing for new petrochemical projects is still possible with creative and innovative thinking, a leading financial consultant said on Friday,

Even bank loans were possible for the right projects, said Daniel de Blocq van Scheltinga, founding partner of the consultancy Polarwide, at the 4th Asian Aromatics and Derivatives Conference in Bangkok.

"For chemical companies and other capital intensive industries, everything that is happening in the financial world is increasingly important," de Blocq van Scheltinga said in opening.

He cited the ongoing legal wrangling between two major chemicals companies as being a good example of the effect of diminishing availability of credit: "The reason for this is that one side of the deal cannot raise the funding as a result of the credit crunch."

Taking a step back, de Blocq van Scheltinga tried to explain to a non-finance audience where the seeds of the credit crunch had been sewn and the magnitude of its impact globally.

"Subprime really is huge; I really can't underestimate it. This is akin to the great recession," he said.

"There was a lot of low-cost funding out there and a lot of banks and other institutions were looking to increase their profits. Then along came these triple A mortgage packages which offered attractive yields. Unfortunately, mixed up in these packages was some nasty stuff."

The danger, he said, had been in lending to "NINJNAs" - people with no income, no job and no assets. The crunch had come when these people had begun to default and house prices simultaneously began to fall, devaluing the initial loans.

"Since the 1990s, there had been no decline in house prices. Obviously, when house prices began to fall it seemed that this would only affect the mortgage lenders." This, sadly, was not the case, and investors began to lose money on what had seemed like well-structured and high yielding investment packages.

"The latest estimate I heard was $1.3 trillion US dollars [€819bn] out there in subprimes. A lot of bankers have lost their jobs."

"How do you [chemical companies] deal with this when you have to go and expand and need funding?"

At first glance, de Blocq van Scheltinga said, it would appear that the funding was not there. "But there is a large and varied spectrum of options. Sometimes you have to think outside of the box. Finance is possible."

By finding the "right mix" of lenders, he explained, it was possible to find funding for viable projects. In fact, diversification of funding could be a good idea as this would "minimise the risk that if one [source] dries up nothing else is possible".

A number of options were open to those seeking cash flow, he went on, adding that this did not always mean relying on lenders.

Bond issues were an option, and were especially lucrative as they tapped a less constrained capital resource.

"BASF raised almost €2bn in April, and many of the markets were already in the middle of a financial storm," he said.

The "big ticket leasing" of new or existing assets was also an option when raising funds, with the value tied into the economic life of the asset.

"[Since last year] I have seen a number of big ticket offerings," he said. "These take some time to close, but it is possible to make money."

Private placing, the offering of shares to a small group of investors, was also attractive.

"Whilst banks are grappling with the credit crunch crisis, there is money available and not just banks have it."

Again, strategic or financial investors could provide a similar source of funds, with the former arriving with a clear aim of profiting over a short term period of around three to five years, and the latter looking for a longer term investment.

Joining the Clean Development Mechanism (CDM) or re-assessing cash management, meanwhile, did not involve reaching out to extraneous investors and could prove surprising sources of capital.

"CDM trading is one of the more exciting areas," he said. These projects are implemented under the Kyoto Protocol in developing countries to help cut emissions.

“Certainly in Asia there is a lot that is possible,” he said. “The end result, financially speaking, can be very profitable and can limit the need for extra funding."

Cash management, meanwhile, involves reviewing existing funds and could throw up cost savings and "spare cash".

Although not a simple process, he said, "You can get money not only out of the system but out of your own company." This could "surprise everyone".

Closing on a serious note, de Blocq van Scheltinga said that it was important to recognise that the financial markets were in turmoil and that this was likely to continue for some time.

"There is a serious credit crunch and it is continuing," he said. "Fortis bank announced a major new rights issue in January for $29bn. Yesterday, they announced that there would be no dividend this year.

"Goldman Sachs came out yesterday with a report that said the City would issue a further $9bn in right downs on top of $44bn to date and that further rights issues would be announced."

Prudent diversification of funding would be a major step for companies, as would reviewing existing resources. "Go through your spare cash or hidden funds. Markets do go through cycles but I believe that chemical companies with good sound structures will not have problems."

($1 = €0.63)

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By: Peter Salisbury
+44 20 8652 3214



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