The buyout boom's big meltdown
Jan 09, 2009
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"Think you've got it bad? Try being a chemical company," said Lex in the FT. Lyondell Basell, a European giant, is on the brink of bankruptcy as it buckles under $26bn of borrowings. Ineos, the UK's largest private company, is having a hard time dealing with its $10bn debt load – although a renegotiation with lenders last month has "bought time". And US behemoth Dow Chemical faces major problems after a joint venture with a Kuwaiti government firm collapsed.
Lyondell Basell is a "lesson in chemistry", said John Foley on Breakingviews. Specifically, it's a lesson on what happens when you add leverage to a cyclical company and apply pressure. Like Ineos, the firm expanded fast by rolling up chemical producers spun off from other firms, culminating in Basell paying $19bn for Lyondell in December 2007. These highly leveraged deals worked well at the height of the boom, but now things are falling apart as the recession hits.
"Profits in bulk chemicals break down especially fast when exposed to declining industrial production," said Foley: Lyondell Basell's $1.2bn interest bill may be hard to cover. Bankruptcy looks certain, which would make it "the biggest – and fastest – buyout meltdown so far".
Dow's costly purchase
Meanwhile, Dow's woes come from a top-of-the-cycle $15.3bn deal to buy speciality chemicals maker Rohm & Haas. The firm was supposed to pair with Kuwait's Petrochemical Industries, but the latter backed out last week. Dow insists the purchase will still go ahead and Rohm & Haas looks unlikely to let it out of the deal cheaply in any case. But investors are unhappy, while ratings agency Moody's has already downgraded Dow's debt to near junk. "[Dow CEO Andrew] Liveris is likely to be in trouble whether he gets the deal done or not," said Heidi Moore on WSJ.com.
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