Refinancing Will Drive Chemicals Consolidation
The next five years will be crucial for the development of the global chemicals industry. Which companies will have the strength to emerge as leaders when the dust settles?
The restructuring and debt buildup that occurred in the chemicals industry from 2006 to 2008 was extraordinary—more than $330 billion in deals over that period, with most deals valued at more than $5 billion. The effect of that debt buildup is nearing: a wave of repayments that will come due between 2013 and 2016. In the next five years, 27 companies will have to repay $110 billion.
As deal activity ramps up again, any new deals are occurring within the context of refinancing the debt from that transaction peak. To gain an understanding of the debt situation in the global chemicals industry, we analyzed more than 200 companies, both public and private, spanning different sectors in all regions; these companies have debt of roughly $380 billion.
Following are some findings of our research:
- Investment-grade companies will lead the restructuring. The chemicals industry's investment-grade companies have debt-to-equity ratios below 90 percent and EBITDA margins of greater than 10 percent, and about half have Standard & Poor's credit ratings of BBB or above. These companies should be able to maintain and increase their debt relatively comfortably to become potential leaders during the industry's inevitable restructuring. The rest will need to restructure quickly, but some will inevitably find this difficult and fall prey to bankruptcy or takeovers.
- A bubble in America's ethylene supply would affect the European sector’s attractiveness for debt. Europe is likely to come under significant pressure as exports from North America and the Middle East focus increasingly on ethylene. Large-scale naphtha crackers in Europe, which provide the building blocks of many derivative chains, will face financial pressures, and significant closures are inevitable.
- The Middle East looks for partners. As U.S. companies choose to focus their debt raising and resource capacity on the home market, the Middle East will have to expand its partner base to companies that can provide elements such as funds, guarantees, and resources, along with players that are not distracted by investments in their home markets.
- Asian producers are the most active. Since 2006, Asian companies have made more than 40 percent of all deals globally, by number of transactions. Since 2001, when Asia accounted for only 17 percent of deals, activity has increased at a CAGR of 11 percent. In 2012, Chinese companies backed off on deal activity, and most transactions now are taking place within the region.
- The companies with the strongest balance sheets will be the active buyers. Those companies in the strongest position will lead the industry's consolidation. The credibility of their management teams and the coherence of their long-term strategies will be crucial for attracting funds for any merger or acquisition.