INSIGHT: Finding the space to breathe

07 January 2009 14:39  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--How much breathing space do the world’s most highly indebted chemical companies need to weather this storm?

The petrochemical business is in the pits with demand and prices severely depressed. The world’s number five chemicals maker and the global number one in polypropylene, LyondellBasell has sought Chapter 11 bankruptcy protection for its businesses in the US.

Late last year, world number six in chemicals, INEOS negotiated a waiver period on its certain debt convenants until the end of the first quarter. It is expected to present a new five-year business plan to its lenders in April.

But will the petrochemicals and refining world be much different by then? And what demands will INEOS's lenders place on it then: there is fear in the credit derivatives market that INEOS will follow Lyondellbasell into bankruptcy?

True, both these companies, and others in the sector, service a vital need: they perform ‘essential chemistry’; and INEOS has a more broadly-based portfolio than LyondellBasell. But their businesses have run up against the buffer of relentless de-stocking, collapsing consumer demand and the credit crunch, and have been badly hit by the sharply lower oil price.

This is a toxic brew for highly indebted concerns created in heady times when the sector looked so much more attractive.

Len Blavatnik’s Basell acquired Lyondell Chemical, then the third largest publicly traded chemical company in the US, at the end of 2007. Its total debt has been estimated at $26bn. The Chapter 11 filing relates to debts of $19bn and between 25,000 and 50,000 creditors.

INEOS bought BP’s Innovene olefins and derivatives business in 2005 and continued it acquisition drive through the top of the cycle. In recent negotiations with its banks, INEOS sought waivers on covenants on €5bn ($6.8bn) of debt.

LyondellBasell said this week that December had been particularly difficult as many customers postponed orders to reduce inventories. The relentless de-stocking came at the end of a poor six months in which LyondellBasell CEO Volker Trautz said the company had seen a dramatic softening of demand and unprecedented volatility in raw material costs.

“Though we currently anticipate this situation to be short-term and expect customers to increase their purchasing in 2009, we made the decision to file Chapter 11 in order to provide the company with the time and resources necessary to facilitate an orderly restructuring and position the business for the long term.

"During this reorganisation period, our goal is for the company to continue its operations and its relationships with customers and suppliers in the normal course.”

LyondellBasell filed for Chapter 11 bankruptcy protection for its US businesses and one European affiliate on Tuesday as did the offshoot Basell Finance.

Creditors had been chasing the company for payment of fees and interest on a bridging loan and Russian oligarch Len Blavatnik’s Access Industries (which owns 97% of LyondellBasell) had refused to help with a loan. LyondellBasell said its non-US operating entities would continue to function independent of the Chapter 11 process.

The company said last week that it was still paying vendors and receiving payments but that some of these payments were being delayed. While 2008 was still expected to show a profit, the fourth quarter results, which had not then been closed, were likely to be negative.

The situation on the US side of the company was reported to be more precarious with the hurricane-related refinery shutdowns having a significant negative impact. The major plants in Europe were running with no plans for shutdowns except for planned maintenance.

Analysts called LyondellBasell’s mulling of bankruptcy symptomatic of the extreme challenges facing leveraged chemical companies.

LyondellBasell was described as an extreme case but stock prices of highly leveraged companies in the US, such as Ashland, Huntsman, Nalco and Solutia have fallen dramatically. Traders on the bond markets were also betting against LyondellBasell last week.

The highly leveraged chemicals players have little room to manoeuvre in the current environment and can only implement further cutbacks swiftly to help preserve cash. Some hope can be pinned on a petrochemicals market rally over the next few months as de-stocking reverses and, as some analysts suggest, fire sales come to an end down the value chain. But there is little to suggest that a rally could be anything other than short lived.

International eChem chairman, Paul Hodges, rightly suggested in ICIS Chemical Business (ICB) this week that chemical company CEOs have to be prepared for a “marathon not a sprint”. Olefins and polyolefins players particularly face an extended downturn, exacerbated by the credit crisis, currency volatility and recession that consultants ChemSystems have suggested will lead to a trough in 2011.

INEOS suggested in December that its businesses were capable of generating cash under normal bottom of the cycle conditions. But the sector currently is facing its deepest downturn in a generation.

Over the next few months and quarters for many chemical companies it will still be a question of survival.

($1 = €0.74)

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By: Nigel Davis
+44 20 8652 3214

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