Debt Repayment Triggers Restructuring Tide for Global Chemicals
A new analysis by A.T. Kearney paints a turbulent picture ahead for global chemicals players as a $33 billion debt peak in 2016 combines with depressed margins resulting from U.S. shale gas to force a major divestment frenzy that will reshape the landscape for at least 27 chemicals businesses with turnover of more than $1 billion. These companies will preside over a debt mountain of $110 billion in the next five years.
As a whole, 200 of the sector's leading public and private companies have a combined $380 billion of debt sitting on their balance sheets.
The A.T. Kearney study Refinancing Will Drive Chemicals Consolidation finds that the flurry of deals that occurred in the chemicals sector between 2006 and 2008 are now spurring a wave of repayments that will come due between 2013 and 2016. At the same time, deal activity is expected to increase, thanks to a resurgent U.S. industry seeking project financing for up to 10 new world-scale cracker and derivative plants. The original lenders in the sector have suffered through painful write-downs with companies such as LyondellBasell and Ineos. As a result, industry consolidation is inevitable as lenders and the industry move to strengthen companies prior to financing. Overall, these developments are opening up an opportunity for new entrants and companies from Asia and the Middle East to acquire or merge with established Western chemical companies.
The A.T. Kearney study also explores two potential scenarios to map the next five years in the global chemicals sector. Under the first scenario, feedstock availability is already equivalent to the generation of eight new world-scale ethane crackers, but the scale of investment could be much larger if companies exploit liquefied petroleum gas and condensate as well as ethane.
The second scenario illustrates the potential impact of using the existing liquids cracker flexibility in the United States for LPG cracking with the ethane dedicated only to new capacity. This shows how another 15 million tons per year of feedstock could be consumed in addition to the much anticipated ethane consumption which is already been well explored. Flexibility and optionality in feedstock supply will form a critical part of any investment decision and the U.S. industry has the potential to be advantaged across the feedstock range.
A.T. Kearney analysts say that any new deals now are occurring within the context of refinancing debt from the transaction peak and it is investment grade companies that will lead the trend. Some companies, such as Ineos, refinanced part of their debt in 2012. However, according to A.T. Kearney analysis the bulk of the debt repayment is concentrated over the next few years, with levels of $22 billion to $26 billion through 2015 leading to a peak of $33 billion due in 2016. This comes at a time when U.S. project activity is increasing because of shale gas, drawing funds into the industry to add significant amounts of new capacity.
Richard Forrest, a London based partner in the Energy and Process Industries Practice at A.T. Kearney, said: "Looking ahead, any potential oversupply that new capacity causes will depress margins and present significant challenges for those seeking to refinance their existing debts. In recent times, Asian acquirers have accounted for more than 40 percent of all chemical deals but we now estimate that half of the world's chemicals companies are poised to lead the next wave of restructuring. "
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