30 April 2010 21:50 [Source: ICIS news]
HOUSTON (ICIS news)--LyondellBasell's filing under US Chapter 11 bankruptcy protection marked the culmination of some of the biggest trends in the chemical industry, from leveraged buyouts and record oil prices to massive hurricanes and the worst downturn since the Great Depression.
LyondellBasell left bankruptcy protection on Friday, nearly 16 months after its filing on 6 January 2009.
LyondellBasell was formed roughly a year earlier, when Lyondell Chemical merged with Basell, the last of the big chemical deals of 2007.
Credit was cheap at the time, allowing firms to pursue highly leveraged deals, according to a lawsuit filed in connection to the Lyondell acquisition.
In fact, 2007 was a record year for chemical deals, with $55bn (€42bn) in acquisitions, according to statistics compiled by the investment bank Young & Partners.
The LyondellBasell deal was big even for 2007, valued at roughly $20bn.
Basell offered $48/share for Lyondell, a 45% premium of the company's stock price when the possibility of a deal was first announced.
The deal burdened the company with what Lyondell itself called "significant debt". To service that debt, the merged company would need large amounts of cash. That money would vanish by the time LyondellBasell celebrated its first anniversary.
The same month that the Lyondell deal closed, the US economy fell into a recession, limiting demand for petrochemical products.
Just as demand was falling, crude oil resumed its incredible run-up, part of a worldwide commodities boom. On 3 July 2008, West Texas Intermediate (WTI) closed at an all-time high of $145.29.
Lyondell was particularly sensitive to high crude prices because many of its crackers relied on crude-based feeds. High crude prices increased operating costs.
Moreover, it was difficult for Lyondell to pass through those costs, given competition, market consolidation and weakening demand, the company said.
The high prices did provide one benefit. Oil prices played a large part in determining Lyondell's borrowing base. High prices increased Lyondell's borrowing limit.
Later that year, Lyondell would lose that advantage as well.
In September, the world's downturn hit its high-water mark. Lehman Brothers went bankrupt that same month, and the world's financial markets collapsed.
To preserve cash, companies cut purchasing and depleted inventories. Demand fell sharply, setting off a deflationary spiral that destroyed margins.
At the same time, Lyondell's borrowing base shrank, as crude prices fell to $36.22/bbl on 18 December 2008.
In less than six months, crude prices had fallen by 75%.
Even without the volatile oil prices, the massive debt, the frozen credit markets and the recession, 2008 would have still been a difficult year for LyondellBasell.
In September, hurricanes Gustav and Ike forced LyondellBasell and much of the Gulf coast chemical industry to shut down most of their plants, costing companies hundreds of millions of dollars in lost production and property damage.
By the end of 2008, Lyondell ran out of money. It filed for Chapter 11 bankruptcy protection on 6 January 2009.
($1 = €0.76)
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