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The Financial Crisis_ Credit Quality and the Outlook The .ppt

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The Financial Crisis_ Credit Quality and the Outlook  The .ppt Powered By Docstoc
					  The Financial Crisis, Credit
Quality and the Outlook for M&A

         ISM Chemical Group
             New Orleans
           February 12, 2009

            Joseph Chang
             Global Editor
                   Domino Effect


 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
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Source: ICIS pricing
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                                                                                         ICIS Petrochemical Index (IPEX)
                          Q4 Disaster


                           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
                Rapid Response



 Temporary closure     Closing 20 plants     Idling 100 plants
  of 80 plants
                        Temporarily idling    Cutting 2,500 jobs
 Cutting production     180 plants
                                               Dismissing 4,000
  at 100 plants
                        Cutting 5,000 jobs     contractors
 20,000 employees
                        Dismissing 6,000
  “affected”
                         contractors
      A Heavier Debt Load

North American chemical industry credit quality

                    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
                  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
  Leverage Ratios Will Get Higher
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
        Wall Street Crystal Ball 2009
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, 2009
Source: Yahoo! Finance, ICIS Chemical Business
       Refinancing Risk

 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
Financing Market Not All Dead


 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
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 deal
Apollo 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
    M&A Outlook 2009

          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
    Crisis = Opportunity

 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
    Pole Position
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
Recipe for Disaster


     Wall Street and Management
                     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
 Sources: Young & Partners, ICIS Chemical Business
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Source: Yahoo! Finance
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                                                                                                            No Tolerance For Leverage
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Source: Yahoo! Finance
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                                                                                   NOVA Chemicals




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Source: Yahoo! Finance
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                                                                              Celanese




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Source: Yahoo! Finance
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       Change in Attitude Needed


 “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!
             Buyback Mountain

 The benefit
   Can increase EPS in the short term
   Can prop up or increase stock price

 The cost
   Funds could have been used for debt
    paydown, R&D spending, capital
    projects, acquisitions
   Reduces financial flexibility in the
    inevitable downturn
    Stock Buybacks

(ala shooting yourself in the foot, um, leg)
Thank you!


       Joseph Chang
          Global Editor

        360 Park Avenue South
         New York, NY 10010

            (212) 791-4224
        joseph.chang@icis.com

				
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