ICIS Webinar: Debt ratio spikes in chemicals amid coronavirus likely to be transitory - Moody’s

Author: Joseph Chang

2020/05/26

NEW YORK (ICIS)--The expected increase in leverage ratios for US and European chemical companies amid the coronavirus crisis is likely to be transitory, analysts at credit ratings agency Moody’s Investors Service said on Tuesday.

“We don’t believe any of these companies have been permanently harmed. There will continue to be ratings downgrades but we don’t want to move just because there’s a recession, especially on the investment grade spectrum,” said John Rogers, chemicals analyst at Moody’s, on an ICIS Webinar.

“In our ratings approach, we are looking at this like a recession but focusing on companies that have other fundamental as well as company-specific issues,” he added.

Companies already under stress pre-pandemic included BASF, Eastman Chemical, Mosaic and Sasol. Others such as LyondellBasell, Westlake Chemical and INEOS are impacted by a flattening cost curve from the decline in crude oil prices. And then others have company-specific issues such as Chemours, NOVA Chemicals and Olin, said the analyst.

Moody’s has already taken 26 ratings actions and made 24 outlook changes in the chemical sector thus far in 2020, with 85% of the downgrades and 60% of the outlook changes in the speculative grade (below investment grade) category.

About 65% of the downgrades have been in the single-B spectrum of the speculative grade category - mostly B2/B3 on concerns over lack of free cash flow, liquidity and covenant breaches, said the analyst.

Most of the risk is concentrated in the more vulnerable B2/B3 names, especially for companies with debt maturities coming up through 2022 and that lack free cash flow, said Rogers.

Average chemicals earnings before interest, tax, depreciation and amortisation (EBITDA) in North America and Europe, the Middle East and Africa (EMEA) could fall by around 20% year on year in 2020 as a result of coronavirus disruption and the severe downturn expected for May and June, according to Moody’s.

Commodity chemicals will see more severe declines in the 30-50% range, while specialty chemicals should see more modest declines of 10-15%, said Rogers.

With the major declines in EBITDA, the debt/EBITDA leverage ceilings in debt covenants are in danger of being breached.

“By the end of Q1 2021, most investment grade companies will be stressed in terms of credit profiles, so we expect more covenant amendments. Wider covenants are needed through 2021,” said Rogers.

Here companies typically work with lenders to adjust allowable debt/EBITDA ratios higher, usually at a cost to the companies in terms of fees or higher interest rates.

Yet, most larger companies will still be able to generate cash flow during the downturn. Companies are cutting capital expenditures and drawing down working capital for sources of cash, he added.

And today’s situation is different from that of the great financial crisis of 2008-2009, the analyst pointed out.

“Banks do have the ability to lend, so access to financing is less of an issue than it was in 2008-2009,” said Rogers.

In the US, even non-investment grade chemical companies have been able to issue debt.

On 14 May, Olin issued $500m of 9.5% debt due in 2025. Earlier on 24 April, Tronox sold $500m of 6.5% debt due 2025.

On the investment grade spectrum, LyondellBasell on 15 April raised $2bn in debt in three tranches - $500m of 2.875% notes due 2025, $500m of 3.375% notes due 2030 and $1bn of 4.20% notes due 2050.

In Europe, short-time work programmes have provided support to chemical companies, said Moody’s European chemicals analyst Martin Kohlhase.

These programmes allow companies experiencing economic difficulties to temporarily reduce the hours employees work with the government providing income support for the hours not worked. Companies have thus been mostly able to avoid layoffs.

“This provides support in the short term and helps companies to quickly cut costs and support cash flow. However, it is not a full offset to the economic and credit damage,” said Kohlhase.

In Europe, investment grade chemical companies have tapped the debt markets through bank loans and selective debt issuance amid the Covid-19 crisis.

On 14 April, AkzoNobel issued €750m in debt due 2030 at a coupon of just 1.625%. The company has a solid balance sheet. At the end of 2019, it had cash of €1.2bn and a net debt/EBITDA ratio of just 0.7x.

However, there have not been any speculative grade debt offerings yet during the crisis, he noted.

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