Refinancing shortfalls could trigger more M&A (and a lot more acquisition opportunity)

Many companies need to divest assets for additional liquidity; innovative and brave entrepreneurs could pick up good business with a reasonable valuation. There are some interesting financing aspects to trigger more M&A activities in chemical market. In normal times the debt markets typically favor the chemical industry, because it has good cash flows. For this same reason, many bulge-bracket / larger private equity firms enjoyed acquiring chemical manufacturing companies. However, the continued credit crunch and related liquidity crisis are causing problems for many chemical companies that need to refinance or restructure debt. General industry is affected by several issues such as: earnings and cash flows are down because revenues/volumes are down due to the economic downturn, limited credit availability to adequately finance of ongoing operations, working capital, refinance of existing maturing debt, and the capital market is reluctant to deploy equity for weaker companies. Companies with decent credit that couldn¹t roll over their debt are the real tragedy, because they wouldn¹t be having such problems if not for the credit crisis. Getting either debt or equity financing currently is challenging for all but investment-grade companies, because the economic downturn has been more severe than usual and the credit crunch is exceptionally severe. Overall chemical debt issuance is down dramatically (e.g. $18.8 billion in 2007 to $11.1billion in 2008), and willing banks are seeking terms that are much tougher and expensive than in the past. For example, the high-yield debt rates could be in the range of 17%-18% (a historic high)!

Some high-profile chemical industry bankruptcies, most notably those of Chemtura and LyondellBasell Industries, demonstrate the difficulties facing chemical makers as profits and debt financing options disappear. Highly leveraged companies are in the worst position, but the difficulties are widespread.

It would be interesting to see what happens some of the high levered chemical companies like Hexion, Momentive, Rockwood and so on.

W.R. Grace is probably having difficulties in obtaining credit may force it to delay its exit from bankruptcy if current funds are not sufficient to fund its operations until its bankruptcy plan is approved.

Ineos has requested an extension to the debt covenant waiver that the company agreed to with its creditors last December for an extension of the waiver until July 17, because the original waiver agreement was for six months and is due to expire this month. Creditors will probably comment on the request by May 22.

Chemtura get a little help on credit because U.S. Bankruptcy Court for the Southern District of New York has granted final approval of Chemtura’s $400-million, debtor-in-possession (DIP) credit facility, allowing the company access to the facility. The company also received approval of an amendment to the DIP facility that allows it to provide liquidity to foreign subsidiaries if needed. The financing will allow Chemtura to continue to operate as bankruptcy proceedings continue.

JLM Industries (Tampa) has files for Bankruptcy. The general assignment will likely result in the liquidation of the company’s assets as an alternative to Chapter 7 bankruptcy. The equity fund providing collateral for JLM’s credit line went out of business, resulting in the withdrawal of the credit line and the need to liquidate!!

LyondellBasell’s U.S. operations and a holding company in Germany filed for Chapter 11 protection in the U.S. in January after ongoing negotiations with lenders failed to result in a credit extension agreement. Recently, LyondellBasell has added its European holding company to its U.S. filing for Chapter 11 bankruptcy protection. LyondellBasell Industries AF (Luxembourg) has been added to the filing to protect it against claims by certain financial and U.S. trade creditors. The Company will continue to conduct business worldwide while the company develops its reorganization plan as part of the Chapter 11 process.

These are a few interesting stuff in chemical space and the question is how could you benefit from it?