Debt Crushes LyondellBasell

LYONDELLBASELL INDUSTRIES has made history by filing for the largest ever bankruptcy in the chemical industry. The company applied in U.S. District Court to place its U.S. operations and a holding company in Germany under Chapter 11 bankruptcy protection.

Faced with debt estimated at $26 billion and unable to reschedule payments to its creditor banks, the company filed for the protection last week in the Southern District of New York, in Manhattan. Its non-U.S. operating entities will continue to function independently of the Chapter 11 process.

LyondellBasell was created just a year ago, when Basell acquired Lyondell. The new company's pro forma 2007 sales were $44.7 billion, a total that would have placed the firm in the number four position—after BASF, Dow Chemical, and Shell—in C&EN's annual ranking of the top chemical companies. The acquisition, however, added roughly $12 billion to the new company's debt.

Len Blavatnik, head of Basell's owner, Access Industries, defends the purchase. What Basell paid "was a full price but not a crazy price," he says. LyondellBasell planned to pay off a significant proportion of its debt in 2008, Blavatnik adds, but then "everything that could go wrong did go wrong." Access has pledged to provide $750 million to help pull the company through Chapter 11.

LyondellBasell's troubles became apparent in November when credit ratings agencies such as Moody's and Standard & Poor's began downgrading its debt. That assessment accelerated at the end of December when the company acknowledged that a Chapter 11 filing was an option. The day after the bankruptcy filing, Moody's downgraded LyondellBasell's rating again, pointing out "the remaining uncertainty with respect to the resolution of the restructuring of the company's liabilities."

LyondellBasell is not the first chemical company to enter Chapter 11. Other large bankruptcies have included Solutia, Dow Corning, and W.R. Grace. That trio, however, acted primarily because of environmental liabilities. The chemical producers facing economic woes severe enough to force them into bankruptcy all had been much smaller than LyondellBasell.

LyondellBasell's $26 billion in debt, in fact, dwarfs the long-term liabilities of other industry players. The debt is nearly 13 times the company's operating earnings. In contrast, the long-term liabilities of BASF, the largest chemical company, are just slightly larger in total than its operating earnings.

The LyondellBasell bankruptcy raises a number of questions, says Chris Stirling, European head for chemicals and pharmaceuticals analysis at consultants KPMG. "The big one is, 'Are there others in similar situations?' People are nervous about any company that is highly geared" or leveraged, he says.

The company's filing will cause anxiety throughout the industry, Stirling predicts. "Suppliers will worry about being paid. And customers will be worried about security of supplies. This is pretty uncharted territory," he says.

Industry watchers point to U.K.-based Ineos as another large chemical company that used leverage—incurring debt based on assets already held—to acquire more assets. Through aggressive financing, its managers built from scratch a chemical producer that is one of the top five worldwide. Ineos has been facing the same operating problems that LyondellBasell faces—falling demand and wildly fluctuating raw material and product prices.

In early December, Ineos had to negotiate a holiday from various covenants attached to its loans and bonds pending the release of a new business plan in May. The breather came at a price—lenders will receive higher paybacks on the loans—but the company avoided default. And it stands by the statement issued in December that "liquidity remains strong; the company has a good cash position and will continue to meet the payments on its loans."