UpdateLyondellBasell mulls bankruptcy protection

31 December 2008 19:53  [Source: ICIS news]

(Adds analyst comments in paragraphs 11-19)

LONDON (ICIS news)--LyondellBasell has held discussions about entering Chapter 11 bankruptcy protection internally and with banks and outside counsel, a source at the Netherlands-based petrochemicals major confirmed on Wednesday.

“There have been internal discussions and also discussions with the banks about the possibility of Chapter 11, but there has been no confirmation either way,” said the source.

On Monday, its subsidiary Lyondell Chemical said in a filing with the US Securities and Exchange Commission (SEC) that it had begun talks with lenders in order to extend payment dates and restructure its debt. On Tuesday two major credit rating services downgraded their ratings for the company.

The source at LyondellBasell Europe said: “In Europe we are still paying our vendors and receiving payments. However, due to the economic downturn some companies are delaying payment to us or have gone out of business.

"Normally the banks would help in this situation, but the banking industry is in a worse state than petrochemicals at the moment and they have cut our overdraft going into the year end.”

The European division of LyondellBasell benefited from soaring oil costs over the summer but has suffered from falling crude prices and a drop-off in downstream demand in the later part of the year.

While 2008 was still expected to show a profit the fourth quarter results, which have not yet been closed, were likely to be negative, according to sources.

The situation on the US side of the company was reported to be more precarious.

“The shutdown of US Gulf refineries following Hurricane Ike had a tremendous effect on earnings for the US side of the company - the refineries are a cash cow for the company,” the source said.

The source. however, denied talk of cutbacks in production. “Our major plants in Europe are all running, and we have no shutdown plans other than scheduled technical shutdowns.”

LyondellBasell mulling bankruptcy is symptomatic of the extreme challenges facing leveraged chemical companies, said one Wall Street analyst.

“The combination of soft end markets, inventory destocking, and a sharply higher cost of capital is hurting chemical companies that combine operating and financial leverage, said Jefferies & Co analyst Laurence Alexander.

“Lyondell is an extreme case, but similar concerns have weighed on a range of companies,” he added.

As a result, stock prices of highly leveraged chemical companies such as Ashland, Huntsman, Nalco and Solutia trade mostly on the prospects for paying down debt, said Alexander.

Shares of Ashland, Huntsman and Nalco are down 83%, 87% and 57% from their respective 52-week highs. Solutia, which emerged from bankruptcy in February, has seen its shares plunge 75%.

“The Lyondell issue is symptomatic in another way. Chemical shares rarely outperform when debt yields are rising - there’s too much competition from other parts of the capital structure,” said Alexander.

Chemical company debt prices have fallen sharply in recent weeks, creating more competition for chemical stocks. And senior debt-holders are first in line for any payments from the company while shareholders are last.

However, the financial and economic crisis has created opportunities for strong companies in the financial position to make acquisitions, said the analyst.

“There should be opportunities for companies with strong balance sheets to pick up attractive assets over the next 6-12 months, but credit markets need to ease if there’s going to be significant M&A,” said Alexander.

Meanwhile, the Associated Press reported that LyondellBasell planned to add 42 jobs at its office in Wilmington, Delaware. The company could not be reached for comment.

Additional reporting by Joe Chang

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By: Rachel Howat
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