INSIGHT: Protecting European operations is key for LyondellBasell

18 February 2009 17:18  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--LyondellBasell desperately needs a clear upturn in the key European and North American polymers markets if it is to successfully avoid bankruptcy.

Delayed payment of the coupon on two European bonds will help it negotiate this extremely difficult period. But the initial payment default, on 15 February, speaks volumes.

This is a business in deep trouble. US creditors have been prevented by the court from trying to collect on debts covered by guarantees from the solvent LyondellBasell companies. But the European operations are under threat.

The holding company, Luxembourg-registered Lyondell Basell Industries AF, has limited assets so the pressure is put on the European operating affiliates. LyondellBasell argued successfully earlier this month that attempts to claim against the European operations would damage reorganisation in the US.

This is a highly integrated company which ultimately could be forced into involuntary bankruptcy proceedings in Luxembourg and proceedings in eight countries. The company’s chief financial officer, Alan Bigman, admitted in court documents it would not be possible to coordinate those proceedings.

LyondellBasell, however, appears to be teetering near the edge.

Standard & Poor’s on Tuesday thought it unlikely that LyondellBasell Industries AF would pay the coupon on two bonds worth together €1.11bn ($1.4bn) within a 30-day grace period.

Basell Finance Co BV is scheduled to make a payment on $300m of notes due 2027 on 15 March, but S&P considers it “unlikely” that Basell Finance will make that payment.

Companies don’t default on coupon payments unless they are in trouble. The European polymer markets are very weak and there is little relief in sight. Cash flow across the group is likely to be poor.

The European businesses also are not benefiting from the restructuring financing provided for the Chapter 11-covered operations.

“We view LyondellBasell’s liquidity as weak because it has limited access to the debtor-in-possession (DIP) financing facilities of its Chapter 11 filed subsidiaries," S&P said on Tuesday.

“In addition, we expect LyondellBasell’s group’s [sic] operating cash flow generation to remain very weak in the coming months as a result of a significant decline in demand for plastics and low capacity utilisation for LyondellBasell’s’ plants across the globe.”

LyondellBasell had sought up to $8bn in DIP financing under its Chapter 11 filing, which covered 79 affiliates.

S&P says it will assess the DIP facilities when it has adequate information, which it expects within a matter of weeks.

LyondellBasell is operating in a particularly difficult environment and recovery seems a long way off.

December and January were particularly difficult months for petrochemicals and polymers producers worldwide with the polymer makers suffering most as sector financial results have shown.

The situation in Europe has not improved but, indeed, worsened into February.

The ICIS polyethylene margin report for the year to date shows integrated PE margins over feedstock and key variable costs as low as €230/tonne. That compares with integrated margins in the fourth quarter of 2008 of €970/tonne.

Ethylene prices have dropped from December and polymer prices have continued to be under severe pressure. Demand is low although there are indications of some improvement as customers re-build stocks.

LyondellBasell is not alone in seeking to preserve cash but has been forced to idle low density polyethylene (LDPE) operations in Carrington in the UK and Fos sur Mer in France in the face of the crisis.

PE producers in Europe have been pushing for an €80-100/tonne price increase to cover the increased cost of ethylene feedstock and recover margins on the polymer which were negative in December.

Polypropylene margins in Europe in the fourth quarter were deeply negative but have turned round in the first weeks of 2009. Returns, however, are hardly sufficient to cover fixed costs and are not believed to be cash generative.

Protecting the European operations is key for the company if it is to successfully use the DIP financing and the Chapter 11 umbrella to restructure and ride out this storm.

The European and global affiliates may not directly benefit from DIP funds but the success of the Chapter 11 restructuring is essential for their survival.

The collapse of part of the highly integrated company is difficult to contemplate and would put all creditors at risk, although some who have taken positions in the credit default swaps (CDS) market are reckoned to be working to push the European operations into default.

LyondellBasell’s injunction against the US creditors seeking claims in the European businesses runs until 23 February. LyondellBasell has asked for that injunction to be extended.

($1 = €0.79)

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By: Nigel Davis
+44 20 8652 3214

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