June 2009 Archives

At first glance, Huntsman's $1.73bn cash and financing settlement with Credit Suisse and Deutsche Bank stemming from its busted $10.6bn planned merger with Hexion Specialty Chemicals appears underwhelming.

Huntsman actually gets just $632m in cash, including $12m for the reimbursement of litigation costs. You'd think in today's environment, where banks are public enemy number one, the company could have gotten more. It was seeking more than $4bn in damages in a Texas state court.

The rest of the settlement - $1.1bn - is in the form of loans to Huntsman. But cash is cash, and loans you have to pay back (or at least should). Many on Wall Street expected at least $1bn in cash in a settlement.

But at least the financing, in the form of $500m in senior secured 7-year term loans and $600m in 7-year unsecured notes, come on very attractive terms. And that's where you get additional, tax-efficient value. After all, Huntsman is paying a $145m tax bill on its $632m cash portion, yielding $487m after taxes - but nothing up-front on the loans for the tax man.

The term loans have an interest rate of LIBOR (London interbank offered rate) plus 2.25%, which amounts to about 3% today, while the rate on the notes are pegged at 5.5%.

These days, you can't find those kind of rates on high-yield corporate debt - if you're even able to tap the debt markets at all.

Moody's Investors Service rates Huntsman's debt at Ba3, the equivalent of a BB- rating at Standard & Poor's - three notches below investment grade. John Rogers, who heads up the chemical group there, estimates that in today's environment, the term loans would carry an interest rate of 3-4 or more percentage points higher, and that the notes would have rates of 11-12% or higher.

Using the settlement proceeds to pay off its $295m in 11.625% senior secured notes due 2010, and potentially paying down its $200m in 11.5% senior notes due 2012, Huntsman will bank considerable interest expense savings for years to come.

For example, the annual interest it pays on $295m of its 11.625% debt due 2010 and $200m of its 11.5% due 2012 amounts to about $57m. In comparison, the annual interest on its new $500m term loan at around 3% (3-month LIBOR plus 2.25%) is about $15m - for now.

Shares of Huntsman fell 4 cents to $5.92 on the settlement Tuesday, after being down as low as $5.25. While Wall Street was disappointed about the amount of the settlement, Huntsman's shares could still offer value, especially with a now safer dividend yield of 6.3%.

Remember, Wall Street also was underwhelmed by Dow Chemical's merger terms with Rohm and Haas in April before its stock shot up from around $8 to over $15 today.

When the European Chemicals Agency unveiled its top picks of chemicals of high concern to be dealt with most urgently under the EU's Reach chemical regulation, long-established flame retardants were included. Elsewhere, a plethora of bans and restrictions on substances such as these, plus other plastic additives, are coming into force.
In the US, the Consumer Products Safety Improvement Act restricted the use of phthalates in toys and other children's products earlier this year. And even China, which has a reputation for lax environmental regulation, has introduced legislation that seems to be tougher than European equivalents.
The chemical industry tends to react against these restrictions, claiming they are based on unsound science. Whatever the rights and wrongs of that argument, this can undermine good public relations. The American Chemistry Council recently acknowledged that the
industry's handling of the controversy about bisphenol A (BPA) in babies' bottles could have been better.
Put "BPA" into Twitter, the online messaging service, and you'll see a lot of messages from people claiming the industry is trying to stop regulators from protecting them. With tougher regulation of plastic additives a fact of life, the chemical sector must think carefully about getting a smart PR message out there.

Strolling through a glasshouse at Kew Royal Botanical Gardens, London, the other day; I noticed some strange paper packets hanging from the branches of the exotic trees growing there. Closer inspection revealed the name Syngenta. I'd discovered a biological control device full of organisms which would control pests.
The fact that a world-class garden such as this - with its many research links to mainstream agriculture - is using biopesticides gives an indication just how acceptable and widespread this form of pest control has become.
This is still a tiny sector, accounting for only 1-2% of the $32bn (E22.9bn) global pesticide market. But consultants estimate it is growing by more than 20% year, especially in conventional agriculture.

Last week I attended an unforgetable conference in Helsinki. This piece I wrote just afterwards sums up the atmosphere.  Would love to know if anyone else who was there agrees?

If two words could sum up the mood of chemical sector representatives at the recent gathering in Helsinki, Finland, they would be "frustration" and "anger."
The European Chemicals Agency (ECHA's) Second Stakeholder Day on May 27 was a rare opportunity for the industry to come face to face with the organization that is responsible for implementing Europe's Reach chemical regulation.
Anyone who has attended a chemical industry conference will know that organizers are lucky if they get one or two questions from the audience after presentations. More often, there are none.
Imagine journalists' surprise as an incredible scene unfolded at the conference here in Helsinki. Delegate after delegate queued up to bombard a panel of embattled ECHA representatives perched at a safe distance on the podium. Most were from chemical companies finding it all but impossible to follow the system of data submission that must be completed under Reach by 2010.
Producers of any chemical in volumes of 1,000 tonnes or more - roughly 80% of Europe's output - plus those manufacturing a list of particularly hazardous substances of special concern, must submit detailed dossiers of safety and usage data to ECHA by December 2010.
To do this, they must form Substance Information Exchange Forums (SIEFs), which are groups of producers of the
same substance.
Perhaps the biggest cause of anger and frustration is the inaccessibility of ECHA. People with queries have no option but to email a help desk. Many delegates said answers take weeks to arrive and often refer questioners back to existing guidance which they were already aware of.
There is no way to speak to a human being at ECHA - so it was no wonder the audience were keen to do so on this occasion.
Erwin Annys, director of Reach policy at Europe's trade body Cefic, was a speaker at the event. He used the opportunity to urge ECHA to set up a telephone hotline.
But ECHA director general Geert Dancet ruled out the idea, claiming it would involve too many languages and be too complicated. One would have thought English - the language spoken at the conference - would do.
Apart from the lack of human contact from ECHA, other key complaints from delegates centered on the problems of forming and operating SIEFs. There were many people present who were taking a lead responsibility for Reach implementation. It sounded like some had been banging their heads against a brick wall.
The key role of SIEF lead registrant caused a lot of anxiety. "Who would want that job? It is a huge responsibility and will you be liable if it all goes wrong?" asked a delegate on the conference sidelines.
Unfortunately for some, there is a working assumption that the largest producer of a substance should, by default, become the lead registrant. The role, therefore, is being thrust upon producers that  are not necessarily willing participants.
Lead registrants must play a pivotal role in communicating with the other SIEF members to coordinate the setting of fee structures and the gathering of information for the dossiers.
A delegate from UK-based chemical firm INEOS gave an example of the problems he is facing in this role. He has 2,000 companies preregistered for his SIEF. Sending an email to them all resulted in 85 bouncing back as having the wrong address and 10 being rejected as spam.
This raised a chuckle among the audience while the ECHA speakers' panel winced.
The panel did its best to bat off the volley of complaints and questions, but often they simply could not answer complex technical queries. Some raised anomalies that are now being addressed.
For example, it emerged that it is impossible for an exporter to Europe to change its legal representative, known as the Only Representative (OR), without the OR's permission because their signature is required on the paperwork.
To give credit to ECHA, it did seem like the panel were listening. The delegate with the OR problem said later that it was being acted on.
ECHA also gave guidance for getting rid of unwanted facilitators for the groups set up to form SIEFs (known as pre-SIEFs). In some cases, facilitators were consultants who were trying to make money out of selling services.
Realizing that time is running out before the 2010 deadline, ECHA also unveiled a package of extra support for lead registrants, including a seminar in the autumn, regular webinars, a forum and a more interactive help desk.
It also revealed a new motto that it hopes trade bodies and the media will put on their websites: "The clock is ticking. Form your SIEF now."
There is no sign of any more time being given to allow the industry to overcome all the SIEF implementation issues by December 2010. And with heavy penalties - including imprisonment - for those in breach of the regulation, the industry must hope that ECHA is now in a better listening mode. It is high time the information bottleneck was removed.

At the same event I also recorded this video in which a top UN official, UN Environment Programme executive director, Achim Steiner, said the industry is not doing enough to clean up its act.

The bankruptcy filing of the once dominant US auto giant General Motors (GM), though widely expected, will have ripple effects across the supply chain.

Businesses will be sold off and shut down, and production will shift to smaller, more fuel-efficient cars, as GM seeks to transform itself into a leaner, more cost-competitive company.

The chemical industry itself will take its lumps as automakers struggle and shift away from producing larger vehicles, which consume more materials. However, this gives the industry a great opportunity to innovate new products and materials suited for fuel efficiency - from increasingly lighter-weight plastics to improved tires that reduce rolling resistance.

The GM bankruptcy coincides with another historic event in the chemical industry.

US-based chemical firm Solutia has completed the sale of its $2bn nylon business for $50m in cash to private equity firm SK Capital Partners II. In addition to the cash proceeds, Solutia will get $4m in annual payments of $1m/year starting in 2011, and retain a 2% stake in the business. Plus, SK will take over $80m in pension liabilities.

All in all, Jefferies & Co. analyst Laurence Alexander estimates Solutia sold the nylon business for $202m in economic value, including working capital adjustments.

Solutia chairman, president and CEO Jeffry Quinn called the sale a "watershed event in the history of our company."

"The nylon business was the [primary] business of Monsanto at one point," he said. "It marks the end to a 50-plus year history of being a part of our business... (and) will help define the course of the company for years to come."

With the sale, Solutia becomes what it calls a "pure-play performance materials and specialty chemicals company," selling plastic glass interlayer, window films, rubber chemicals, and hydraulic and heat transfer fluids.

While around 60% of its annual sales comes from the automotive sector, the company has survived and emerged through bankruptcy, and remains profitable, even in these "worst of times."

CEO Quinn reaffirmed guidance of $325m-$350m in earnings before interest, taxes, depreciation and amortization (EBITDA) for 2009, and Wall Street expects Solutia to earn 50 cents/share this year and 83 cents/share in 2010.

Looking even further ahead, investors may flock to the company's shares as a play on the eventual recovery of the automotive sector.

Already, investors are applauding the deal, sending shares of Solutia up $0.59, or 10.9%, to $6.02 in early Tuesday afternoon trading.

Graphic credit: The Cleveland Leader