The Financial Crisis, Credit Quality and the Outlook for M&A Joseph Chang Global Editor ISM Chemical Group New Orleans February 12, 2009
The Financial Crisis, Credit Quality and the Outlook for M&A
Joseph ChangGlobal Editor
ISM Chemical GroupNew Orleans
February 12, 2009
1/6/09 LyondellBasell files for Chapter 11 bankruptcy in US
1/12/09 Tronox files for bankruptcy
1/21/09 Foamex misses interest payment, defaults on loan
Domino Effect
ICIS Petrochemical Index (IPEX)
Source: ICIS pricing
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Q4 2008 EPS Q4 2007 EPS Volumes
Dow Chemical ($0.62) $0.84 -17%
DuPont ($0.28) $0.57 -20%
NOVA Chemicals ($2.30) $1.00 -23%
Celanese ($0.38) $0.93 -26%
Source: Companies
Q4 Disaster
Temporary closure of 80 plants
Cutting production at 100 plants
20,000 employees “affected”
Closing 20 plants
Temporarily idling 180 plants
Cutting 5,000 jobs
Dismissing 6,000 contractors
Idling 100 plants
Cutting 2,500 jobs
Dismissing 4,000 contractors
Rapid Response
Out of 75 companies under coverage by Moody’s, 54, or 72%, are in the high-yield (junk) category (under BBB-), more than double the 26 at the end of 2001
Out of 69 companies covered by S&P, 43, or 62% of the group are rated junk. And 32 have ratings in the B+ to CCC- level, indicating very high leverage
North American chemical industry credit quality
A Heavier Debt Load
A Solvency Solution?Companies At Risk
Company Rating Notes
Chemtura CCC (S&P) Cut 3 notches on 1/22
INEOS CCC (S&P) Cut 2 notches on 1/23
Aventine Caa2 (Moody's) Equiv to S&P CCC
NOVA Chemicals CCC+ (S&P) Cut 3 notches on 2/2
Georgia Gulf CCC+ (S&P) Stock under $1
Arclin Canada B- (S&P) Likely covenant violation in Q1
Hexion B-, CW negative (S&P) Bonds trade in the teens
Kraton Polymers B- (S&P)
OMNOVA Solutions B (S&P) Stock under $1
Momentive B (S&P) Highly levered but lite covenants
MacDermid B (S&P) Late LBO
PQ Corp. B (S&P) Last big LBO in chemicals
Univar B2 (Moody's) Equiv to S&P B
PolyOne B+ (S&P)
Solutia B+ (S&P) Exposed to auto and construction
Huntsman BB-, CW negative (S&P) Apollo settlement helps
Source: S&P, Moody's, ICIS Chemical Business
Company LBO vintage Debt/EBITDA (LTM)
SABIC Innovative Plastics 2007 9.9x
Cognis 2004 9.0x
Hexion Specialty Chemicals 2004 8.8x
Momentive Performance Materials 2006 8.7x
PQ Corp. 2007 8.0x
MacDermid 2007 7.2x
LyondellBasell Industries 2007 7.0x
Brenntag 2004 6.4x
Kraton Polymers 2003 5.2x
INEOS Group 2005 4.8x
Source: Standard & Poor's
Leverage Ratios Will Get Higher
Majors/Diversified E2008 EPS E2009 EPS % Change Stock price* P/E (2009)
Dow Chemical $2.52 $1.63 -35% $13.44 8.2
DuPont $2.78 $2.18 -22% $24.71 11.3
Celanese $3.12 $1.82 -42% $12.09 6.6
Nova Chemicals $0.77 ($0.14) N/A $3.73 N/A
Huntsman $0.11 $0.08 -27% $2.84 35.5
Eastman Chemical $4.74 $3.13 -34% $28.74 9.2
Specialties E2008 EPS E2009 EPS % Change Stock price* P/E (2009)
Rockwood $1.83 $1.41 -23% $8.55 6.1
Nalco $1.04 $1.10 +6% $10.70 9.7
Cytec Industries $3.46 $2.94 -15% $22.45 7.6
PPG Industries $3.36 $3.94 +17% $40.91 10.4
FMC $4.44 $4.97 +12% $47.02 9.4
Albemarle $2.40 $2.35 -2% $23.00 9.8
Arch Chemical $2.27 $2.07 -9% $24.46 11.8
Ferro $1.22 $1.25 +2% $5.28 4.2
Lubrizol $4.09 $4.13 +1% $36.57 8.9
* As of the close of January 28, 2009Source: Yahoo! Finance, ICIS Chemical Business
Wall Street Crystal Ball 2009
NOVA Chemicals – $250m in bonds expiring April 1 and $126m in preferred shares maturing on October 31
– In talks with banks– S&P cuts rating to CCC+– Stock falls to under $2
Chemtura – $370m in 7% notes expiring July 15– Asset sales needed to repay debt– S&P cuts rating to CCC– Stock collapses to under 50 cents
Refinancing Risk
Investment-grade companies can still issue debt, but at a high cost
– Spreads vs. 10-year US Treasury at 6-9%
Lubrizol raises $500m in 10-year notes with 8.875% coupon – replaces 4.625% notes
Financing Market Not All Dead
EXTRA!!BUSTED
billion-
dollar deal
Dow Chemical’s $15.3bn ($78/share) cash acquisition of Rohm and Haas put on ice Dow refuses to close the deal by deadline
of Jan 27 after receiving antitrust clearance Rohm and Haas sues Dow in Delaware
court Dow stalls for time, negotiations under way Dow has $13bn bridge loan commitment
from Citigroup, Merrill Lynch and Morgan Stanley expiring on July 8, plus $3bn from Warren Buffet and $1bn from Kuwait Investment Authority
Ticking 8% fee means Dow’s purchase price rises by $3.35m/day, or over $100m/month. Maxes out at $500m
Renegotiated deal for lower price with a stock component the most likely outcome. Rohm and Haas stock trades at about $54
Busted billion-dollar dealApollo Management’s $6.5bn ($28/share) acquisition of Huntsman falls apart
Huntsman Sr. and Leon Black threw the lawyers out of the room and talked one-on-one
Settled in December 2008 for $1bn in cash ($750m in cash – no strings, plus $250m in cash from sale of Huntsman convertible notes to Apollo)
Huntsman settled for cash now versus multiple years of court cases
Huntsman will continue its lawsuit against Deutsche Bank and Credit Suisse for pulling the financing
Huntsman stock falls to under $3
Billion-dollar deals will become scarce until financing market recovers
Private equity hampered with no high-yield debt market
Strategic buyers focused on own restructuring, liquidity issues
Number of deals and dollar volume set to decline substantially
Small- to mid-size deals get done
M&A Outlook 2009
$ $
Distressed assets for sale
Falling valuations
Less competition from private equity AND financially strapped chemical companies
Financing still available for strong investment-grade companies
Companies monitoring developments closely
Crisis = Opportunity
Company Rating
DuPont A, Stable
Air Products A, Stable
Monsanto A+, Stable
PotashCorp A-, Stable
PPG Industries A-, Negative
Praxair A, Stable
Sherwin-Williams A-, Negative
Sigma-Aldrich A, Stable
Source: Standard & Poor’s
Pole Position
Sources: Young & Partners, ICIS Chemical Business
Private equity leveraged buyouts (LBOs) of chemical companies rise in 1999 and peak in 2005 at 36% of total M&A dollar volume. H1 2007 also hits 28% of deals and 36% of dollar volume.
Chemical M&A peaks in 2007 at $55bn in deals
Loose lending practices with covenant-lite loans
High leverage became more accepted
Stock buybacks liberally used as a tool to boost shareholder value
Recipe for Disaster
Wall Street and Management
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Source: Yahoo! Finance
No Tolerance For Leverage
Chemtura
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Source: Yahoo! Finance
NOVA Chemicals
Source: Yahoo! Finance
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Celanese
Source: Yahoo! Finance
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Rockwood Holdings
“Optimal capital structure” no longer optimal when cyclicality is taken into account
Companies, especially in cyclical industries, should not take on large amounts of debt
High leverage leaves you vulnerable in tough times – no longer in control of own destiny
Term out debt maturities!
Change in Attitude Needed
The benefitCan increase EPS in the short termCan prop up or increase stock price
The costFunds could have been used for debt
paydown, R&D spending, capital projects, acquisitions
Reduces financial flexibility in the inevitable downturn
Buyback Mountain
Thank you!
Joseph ChangGlobal Editor
360 Park Avenue SouthNew York, NY 10010
(212) [email protected]