Catalyst

Companies involved in three pending $10-billion-plus industry acquisitions in the U.S. each indicated last week that financing for the deals remains in place, despite the much tougher credit conditions that have emerged since the deals were announced.
Sabic, which is paying $11 billion to acquire GE Plastics, scaled back the size of a planned bond offering by nearly 50% last week, in one sign of the change in credit conditions. Sabic had planned two separate eight-year bond offerings of $1.95 billion and €590 million ($800 million), but now will pursue a single $1.5-billion bond offering, according to Moody’s (London). The yields on the bond could exceed 10%, according to published reports, a sign that borrowing costs have moved sharply higher in recent weeks. Sabic will increase borrowings under senior secured credit facilities, typically loans from banks or other institutions, to $7.7 billion, from $6.4 billion, to close the financing gap. Sabic is expected to close the purchase of GE Plastics by late September.
Basell, meanwhile, said last week that it will borrow up to $21 billion to finance its acquisition of Lyondell. Basell obtained debt financing commitments as of July 16 from Citigroup, Goldman Sachs, and Merrill Lynch, and as of August 8 from ABN Amro, according to regulatory filings. The lenders have agreed to provide $14 billion in senior secured credit facilities. Basell will seek to raise the remaining $7 billion from the sale of high-yield bonds or secondary senior secured credit facilities. Lyondell is also apparently monitoring credit markets. “Basell has substantial assets, and, if the financing were not obtained and the merger did not occur, Lyondell would have recourse against Basell,” Lyondell said in regulatory filings last week.
Hexion, which is set to acquire Huntsman for $10.6 billion including debt, restated in quarterly regulatory filings last week that the deal is fully financed and set to close in first-quarter 2008, pending regulatory review. Hexion is number one globally in epoxies, and Huntsman is number three. Hexion, which is owned by private equity firm Apollo Management, may actually benefit from a prolonged antitrust review and it may be happy to extend the close until early next year. “It will be very, very difficult for private equity to issue high-yield bonds before year-end,” says one investment banker.

The global credit squeeze that has shaken debt and equity markets during the past few weeks may cool the feverish pace of industry M&A. Banks are left holding debt of about $400 billion in uncompleted management and leveraged buyouts worldwide, according to estimates compiled by Baring Asset Management (London). Several big chemical deals are in that pipeline, including Sabic-GE Plastics, Basell-Lyondell, Hexion-Huntsman, and Carlyle-PQ Corp. Industry deals with committed financing are likely to proceed, say M&A advisers that CW contacted earlier this month. However, the relationship between buyers and their lenders could become tense if banks are stuck with debt they cannot sell on the bond market. That will curtail further lending until banks are able to clear the backlog. Most bankers expect a recovery by early 2008, citing an overall strong economy. “This is a different situation than what has happened in the past,” says Richard Whitney, managing director/chemicals at Credit Suisse (New York). Lenders have clamped down despite low default rates and relatively strong earnings and valuations, Whitney says. “Credit supply and demand is out of balance right now. It is not just in chemicals. It is on a global scale. There are so many large transactions that need financing.” Borrowing costs will rise as lenders demand higher risk premiums, analysts say.
“We think this is more of a correction or pause,” says Ron Kahn, head of the debt private placements group at Lincoln International (Chicago). “If you go back to the last serious credit crunch, back in 2001, it was driven by defaults and bad credits.” But the drivers are different now as defaults are low and earnings strong. “This has nothing to do with the fundamentals. It’s purely a liquidity issue,” Kahn says. Deals already in process are progressing, says Chris Cerimele, senior v.p. at Lincoln International. However, sale processes that were planned or just starting are likely to be delayed until after Labor Day, as buyers and sellers wait for the situation to stabilize. Banks are likely to tighten lending terms going forward, analysts say.
“M&A could be a tale of two cities for each half of the year in 2007,” says Peter Young, president of Young & Partners (New York), an M&A advisory firm. “There are enough announced and completed first-half deals so that 2007 will still be a pretty active year. The second half is going to be tough, however.