A turbulent forecast lurks for hundreds of chemical players worldwide, a recent study says, including a $33 billion debt peak in 2016 and depressed margins due to a potential U.S. shale gas capacity overbuild, that is forcing a major restructuring frenzy that’ll reshape the industry landscape.
Twenty-seven of these companies with turnover of more than $1billion will preside over a debt mountain of approximately $170 billion in the next five years, according to A.T. Kearney.
And as a whole, 227 of the sector’s leading public and private companies have a combined $380 billion of debt sitting on their balance sheets.
Therefore, the large number of deals that occurred in the global chemical sector between 2006 and 2008 is now triggering a wave of debt repayments that will come due between now and 2016, according to the analysis.
The report, titled Refinancing Will Drive Chemicals Consolidation, analyzed more than 200 companies, both public and private, spanning different sectors in all geographical regions.
The above developments come as increases in U.S. shale gas is leading industry players to seek project financing for up to 10 world-scale cracker and derivative plants.
These happenings, predicts A.T. Kearney partner and study co-author Andy Walberer, will prompt a surge in industry consolidation and M&A activity as lenders and the industry as a whole move to strengthen companies prior to refinancing, particularly since so many of the original lenders in the sector have suffered through painful write-downs over the last several years.
“The landscape for deals in the chemicals industry is shifting,” Walberer says. “As the industry’s debt situation reaches an important stretch with a wave of repayments due, financing capability will become an important M&A driver for both sellers and buyers.”
He adds: “That trend, combined with shale gas driven investments and strategies, will create new catalysts for deals in the chemicals sector in the coming years.”
Measured against the early part of the century, the restructuring and debt buildup that occurred in the chemicals industry from 2006 to 2008 was extraordinary, the study says.
“The industry conducted deals worth more than $330 billion during that period, with the majority of deals valued at more than $5 billion,” the report says. “By contrast, almost two-thirds of the deals made in 2012 were worth less than $1 billion, none were worth more than $5 billion, and the industry’s deals as a whole were worth only $49 billion, the lowest level since 2003.”
One result, officials suggest, is that 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.
“All of the debt that was added to chemical companies’ balance sheets in the run up to the great recession, is now coming due, and the implication is that when these repayments come due in 2015, 2016, and so on, it’s going to be almost a third catalyst for M&A activity in the chemical sector,” Walberer tells Industry Today.
Adding to this large-scale refinancing, there will be a major pull on project finances driven by a new round of billion dollar level investments in U.S. shale-related expansion and new construction, the study says.
“The whole shale resource development has breathed new life into the U.S. chemicals industry overall,” Walberer says. “It certainly helped earnings, but it’s also opened a new door, creating a new catalyst for M&A opportunities, especially for folks outside the U.S. who may want to pick up U.S. companies that they think are well positioned, but temporarily distressed.”
The large round of project investments may be followed, according to the survey, by a cyclical low in commodity markets driven by over building of chemical capacity in the U.S. and globally in select markets.
Walberer adds that his organization’s report was especially noteworthy because the upcoming refinancing wave is not something most people in the industry are aware of or talking about, he says.
“The big reason why our study is important is that while people have been looking at chemical M&A for years, our findings are something new, ” Walberer explains. “The refinancing wave is an additional catalyst for deals in a market that has already received a lot of attention and a lot of interest.”
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