Moody’s seasonal ‘gift’ for SABIC

Its always interesting to see the news stories that are slipped out just before major public holidays, when media attention is likely to be low.

Only ICIS news seemed to spot the announcement by Moody’s that they were placing SABIC Innovative Plastics (the former GE Plastics business) on watch for a potential ratings downgrade. Yet this is a story with potentially major implications for the chemical industry.

SABIC bought the GE business in July, when it was already well known to be suffering from high feedstock costs and increasingly difficult market conditions. But Moody’s felt no qualms then about issuing a provisional Ba2 rating for the debt. Yet on 21 December, Moody’s said that Q3 results might lead to a downgrade.

The key to the story is Moody’s sudden concern over the fact that SABIC used ‘a highly leveraged funding structure’, which it now believes could ‘put more pressure’ on the business. In July, this structure was the norm for chemical M&A deals. But as I noted in October, the subsequent credit crisis has caused lenders to become more risk-averse.

Nobody, least of all Moody’s, is really questioning SABIC’s support for its new Innovative Plastics business. But the ratings agencies, including Moody’s, were very slow to recognise the developing problems in the banking world as a result of the subprime disaster.

By rushing out news of a possible downgrade on this debt, Moody’s are making it easier for themselves to downgrade more debt issued by less well-placed companies during 2008. They can point to the SABIC example as ‘justification’ for a tougher line. Existing borrowers should therefore prepare for similar actions, as well as higher interest payments, during 2008.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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