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FEATURES FINANCE

36 | ICIS Chemical Business | March 19-25, 2012

Financing to be volatile and challenging

PETER YOUNG YOUNG & PARTNERS

The market has improved since the second half of 2011, especially on the high-yield financing front. But a continued recovery will depend on the economy

The chemical financing market is showing signs of improvement in 2012 after a major downturn in the second half of 2011. Volatility in the

high-yield debt market will likely persist, but the investment-grade debt market will remain strong. On the equity side, initial public offer-ings (IPOs) continue to be challenging.

Last year was positive for the chemical in-dustry in terms of earnings and cash flows. With the exception of the IPO market, the chemical sector stock market performance and debt and equity financing markets were positive in the first half of 2011.

But with the turmoil and uncertainty on the economic and financial fronts that esca-lated in early August 2011, chemical stock

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There was a noticeable slowdown in chemical industry debt financing in 2011

www.icis.com March 19-25, 2012 | ICIS Chemical Business | 37

FEATURES FINANCE

With strong cash flows, excess cash, access to low-cost debt financing and no large M&A deals requiring subsequent balance sheet ad-justments through the issuance of equity, the chemical industry’s need for public equity has been limited.

In 2011, $11.6bn of equity was issued as a re-sult of 19 offerings by the chemical industry. This was a record for any one year. However, this dollar volume record was primarily due to the sale of US fertilizer firm Mosaic shares by US agribusiness Cargill and other shareholders.

On the IPO front, three chemical company IPOs – CVR Partners, Rentech Nitrogen Part-

ners and China First Chemical Holding – were completed in 2011. It is noteworthy that the three companies fall into two specialized themes – fertilizers and emerging markets.

The recent U.S. Silica IPO is the first chemi-cal IPO that was not in one of just a few niche areas. So a number of privately-owned chemi-cal companies are watching closely to see if the market door will open up a little to more mainstream chemical companies.

WHAT WILL THE FUTURE BRING?The significant economic and financial uncer-tainty since the middle of last year has led to increased volatility in the equity markets and concerns about another downturn. As expect-ed, basic industries (which includes chemi-cals) have suffered more than the broader market and lost their valuation premium. This will continue as long as uncertainty, particu-larly focused on Europe and China, persists.

Should global economic growth revive, we would expect the chemical stocks to outper-form the market again. However, in an era of

WORLDWIDE CHEMICAL COMPANIES DEBT ISSUANCE FALLS

Non-bank debt issues ($bn)

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High Yield Investment Grade

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Volatility in the high-yielddebt market will likely persist,but the investment-grade debtmarket will remain strong

Peter Young, the president of international investment banking company Young & Partners, has more than 26 years of experience in chemicals and life sciences mergers and acquisitions and financings.

sluggish or zero growth, the industry is likely to trade at a discount to the market.

Numerous chemical companies have filed IPO registrations to either sell equity or to use as negotiating leverage in an M&A sale process. But the stalled IPO market has made these plans difficult.

MODEST ISSUANCEExcept for situations concerning unique ferti-lizers and emerging markets, chemical equity issuance has been, and will continue to be modest, when the poor condition of the equity markets and the market’s view of chemicals are taken into account.

However, we are seeing some improvement in conditions and a slight opening of the mar-ket to less specialized chemical IPOs. Wheth-er this will continue or not is heavily depend-ent on how the global economic and financial picture evolves.

Investment-grade debt volume will be driven by issuer demand as opposed to investor de-mand. M&A related financing will drive vol-ume. High-yield debt issuance plunged in 2011 as investors shied away from risk, but there are signs of a modest revival. Debt fi-nancing volume will be driven heavily by issuer demand as opposed to investor demand.

That has been the reason for the lower vol-umes more recently. However, there have been serious disruptions of the high-yield debt financing markets and flight from risk since early August that will likely continue for some time.

It is our hope that market demand for chem-ical company debt will recover after this re-cent period of weakness and volatility, but much depends on how a number of major economic and financial factors develop.

prices and equity and debt financing condi-tions suffered downturns across the board.

Chemical stock market performance was strong in the first half of 2011, both on an ab-solute and a relative basis, compared to the general market.

The industry traded at a premium to the market, but events in August brought on a se-vere retreat in chemical stock prices.

Jolted by the escalating economic and finan-cial crisis in Europe, the US debt ceiling deba-cle and subsequent credit downgrade by US ratings agency Standard & Poor’s, and an alarm-ing slowdown in Western economic growth, the stock market suffered constant volatility and a significant drop in valuations. This was particularly true for the chemical industry as its cyclical industry halo became a curse.

As a result, chemical stock prices and valu-ations went from a modest premium in mid-year 2011 to valuations by the end of the year that were generally equal to or less than the overall market. This was driven by market fears that cyclical industries, such as chemi-cals, would suffer the most.

NON-BANK DEBT ISSUANCE FALLS There was a noticeable slowdown in chemi-cal industry debt financings in 2011. Global non-bank debt issuance dropped nearly in half to $13.9bn (€10.3bn) in 2011 versus $26.7bn in 2010. Investment grade debt to-taled $10.8bn in 2011 compared to $12.6 bil-lion for all of 2010 – a very moderate drop.

The vast majority of the overall decline, therefore, came from the high-yield market. High-yield debt issuance was only $3.0bn in 2011 compared to $14.1bn for all of 2010. Al-though there was some activity in the first half, high-yield debt issuance in the second half of 2011 was at a virtual standstill.

Why the slowdown? Although investor de-mand continued to be strong, there was a dra-matic reduction in issuer demand for debt capital and some flight from risk and Europe-an high-yield debt.

The dramatic and negative economic and fi-nancial events starting in August 2011 caused the debt markets to deteriorate. The most nota-ble change was the near shutdown of the high-yield issuance market (particularly in Europe) with major high-yield mutual fund cash out-flows and a flight to safety by investors. There was a modest recovery later in autumn, but it was not enough to avoid a dismal 2011 overall.

The beginning of 2012 is showing some re-covery, but the unfolding events in Europe will have a heavy influence on the high-yield market for the rest of 2012.

Global chemical equity issuance has his-torically been very modest each year due to low chemical company valuations and the limited equity financing needs of chemical companies.