InterviewCredit crunch heightens chemical refinance risk

23 January 2009 19:46  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS news)--The current economic downturn may have a more severe impact on leveraged chemical companies than previous downturns because they may not be able to refinance their debt, a Standard and Poor’s (S&P) chemical analyst said on Friday.

“What’s worse, this down cycle, compared to the 2001-2003 time frame, is that the credit markets are complicating issues around liquidity and refinancing risk,” said Kyle Loughlin, team leader of the chemical group at the credit ratings agency.

“In the past down cycle, 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,” he told ICIS news.

But 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, said Loughlin.

“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,” said Loughlin.

The North American chemical industry is significantly more leveraged today than in years past, said the analyst.

Out of 69 North American chemical companies covered by 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 Loughlin.

That compares to 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 [leveraged buyouts], M&A [merger and acquisition] activity and share repurchases in past years caused a tremendous uptick in highly leveraged companies going into this downturn,” said Loughlin.

“Those companies in the B+ to CCC- categories are exposed to higher default risk, particularly in this very constrained credit environment,” he added.

Companies such as Chemtura and NOVA Chemicals are in this category and face upcoming debt maturities, Loughlin noted.

On Thursday, S&P downgraded Chemtura’s ratings 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 (€285m) 7% notes on July 15, 2009, in light of the increasingly challenging operating and credit market environment,” said S&P.

In December, Chemtura had negotiated flexibility with its lenders, obtaining a 90-day waiver on its covenants on its senior credit facility through 30 March. However, the company’s credit facility was cut back from $740m, to $500m.

“That sharply curtailed available liquidity for the company,” said Loughlin.

In addition, during the 90-day waiver period, Chemtura’s borrowings under the credit facility may not exceed $195m though the end of January, nor exceed $190m from February through 30 March.

Shares of Chemtura plunged 20 cents, or 24.4%, to an all-time low of 62 cents in early Friday afternoon trading.

S&P also put NOVA Chemicals’ “B+” rating on CreditWatch with negative implications on Thursday.

“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 1 April and $126m in preferred stock maturing on 31 October, noted S&P.

However, S&P said it believed NOVA has sufficient liquidity to pay down debt. At the end of 2008, the company had $575m in liquidity, mostly available under credit facilities.

($1 = €0.77)

For further analysis on the credit crunch and the state of chemical industry credit quality, look for the 9 February issue of ICIS Chemical Business
Bookmark Paul Hodges' Chemicals & the Economy blog for some independent thinking on how the economy affects the industry
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By: Joseph Chang
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