INSIGHT: Surviving to fight another day

26 April 2010 17:25  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--In January 2009 it was a question of survival. Plants were operating at much reduced operating rates and working capital had been reined back sharply. Business had almost ground to a halt since the end of the third quarter of 2008. The future looked bleak.

That was particularly the case for the most highly indebted chemical companies, for which the threat of bankruptcy loomed large.

The extremely worrying situation led to speculation of all sorts. As value was destroyed, observers asked what could companies do to stop a critical situation from spiralling out of control. Who and what might go down with the sinking ship?

But the ship did not sink. Producers and lenders simply had to talk. Many hundreds of millions of dollars were at stake as were the livelihoods of tens of thousands of customers and employees.

Those talks were tough; and they continued long into 2009 and 2010. Now, recovery is in sight, although by no means confirmed.

The industrial giants have geared back up and are producing bigger volumes again. They were pushed into an extremely tight corner but have negotiated solutions that have not destroyed long-term value.

Large businesses remain intact. Surprisingly, perhaps, ownership has not changed hands in the way many expected it might.

The value destruction in 2008/09 was rightly described as catastrophic. But the basis on which a strong recovery can be made has been retained.

Highly indebted INEOS has talked long and hard with its lenders - beginning in earnest in November 2008 when it sought to re-negotiate covenants on some of its loans.

Those and subsequent talks were diffucult but the company, pushed close to the edge, has persuaded its principal and many hundreds of lenders that its business model can work.

INEOS bonds hit the floor at the start of 2009 but have recovered markedly. Confidence has been sufficient to help the firm issue new debt, restructure and refinance.

On Friday, a court hearing in New York, confirmed LyondellBasell’s ‘plan of reorganisation’ which will see its US subsidiaries and other parts of the business emerge from Chapter 11 bankruptcy protection.

"We are equally grateful to our creditors for the confidence they have expressed in our reorganisation by voting overwhelmingly to support our plan, and to our customers and our suppliers for their support during this unprecedented period in our history,” LyondellBasell CEO, Jim Gallogly, said in a statement.

The company will exit bankruptcy protection quickly and expects to issue new equity as soon as the third quarter.

LyondellBasell went into Chapter 11 reportedly with just 15 days' money in the bank and a debt of $24bn. It will emerge with $7.2bn of debt and with some of its lenders paying a high price for having backed the newly merged group.

But after restructuring forced by the bankruptcy, management reckons the company is stronger and improved.

"Through this reorganization we have solidly positioned the company to be an industry leader with a significantly improved balance sheet, excellent liquidity, a more efficient organizational structure, and a new management team," Gallogly said.

LyondellBasell faces a prolonged challenging operating environment if significant new polymer capacities come on-stream, particularly in low-cost producing regions, as planned. It is not as broadly based as INEOS yet continues to ride the upturn.

Both companies have been through perilous times and sailed close to the edge, but thankfully retained the ability to grow again and capitalise on better opportunities - although they will need the cash flow to do just that.

INEOS on Monday said it had seen record levels of profitability in March in chemicals. Its commodity products are close to the leading edge of the upturn.

“We are quite an early indicator of what is happening in the world economy,” INEOS founder and the firm’s principal owner, Jim Ratcliffe, is quoted as saying in the UK’s Sunday Times this week.

“Clearly there is something significant going on.”

INEOS and LyondellBasell, two of the largest companies in chemicals, need the better times to persist. They are not out of trouble yet.

But corporate value has been preserved. And they have retained the ability at least to be able to grow again and to make the synergies, on which their survival is based, work.

Bookmark Paul Hodges’ Chemicals & the Economy blog
For more on INEOS and LyondellBassell visit ICIS company intelligence
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By: Nigel Davis
+44 20 8652 3214

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