Chem defaults rise on leverage, slowdown - S&P

06 November 2008 17:47  [Source: ICIS news]

HOUSTON (ICIS news)--Defaults could become increasingly likely for highly leveraged chemical companies and producers that rely on end markets in the midst of a slowdown, Standard & Poor's Ratings Services (S&P) said on Thursday.

However, all chemical companies will contend with a global downturn that will lower demand; a Middle Eastern capacity spike that will increase supply; and a financial crisis that will make capital scarce, said Kyle Loughlin, team leader for the S&P's North American chemical team.

Highly leveraged companies will struggle more, he said. Such companies already have hefty debt payments, and their liquidity will be further squeezed by falling demand and rising supply.

Liquidity could further tighten if those leveraged companies have notes that will mature in the upcoming months, Loughlin said. Although few companies have such tight maturity deadlines, they will, nonetheless, contend with such deadlines at a time of tight credit.

At the same time, the housing and automobile markets are still suffering through a downturn, lowering demand for chemicals associated with those sectors, Loughlin said.

So far this year, S&P has downgraded 20 chemical companies, compared with 10 upgrades, Loughlin said. Negative outlooks now make up 30% of the firm's US coverage.

Among those downgrades, 19 are in the speculative grade, Loughlin said.

By contrast, investment-grade chemical firms should remain resilient, Loughlin said. Those companies have healthy balance sheets and business models that have survived past downturns.

In addition, agricultural firms and industrial gas producers should perform well since those markets are not as closely ties to GDP, Loughlin said.

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Author: Al Greenwood
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