The chemicals sector is expected to attract strong high yield issuance in 2004 on the back of increased buyout activity, according to a report from international ratings agency, Fitch. However, the agency cautions that high financial leverage is unsuitable for many chemicals companies.
There are several jumbo deals already in the pipeline such as Blackstone’s €2.6bn debt funding of the €3.1bn acquisition of Celanese. Given the size of deals currently in the market it is likely that high yield bonds rather than mezzanine loans will be used as the junior debt component within the capital structure as has been the case in the majority of chemical LBOs to date.
Sponsors are likely to be encouraged by the current favourable high yield market conditions due to significant investor demand and European high yield investors’ preference for the more liquid jumbo deals, according to Fitch. However investor appetite may diminish if the deals brought to market exhibit overly aggressive capital structures given the historically poor performance of the sector.
Fitch’s analysis of a pool of European high yield CDO transactions that closed between 2000 and 2002 reveals that their exposure to the chemicals industry, principally through leveraged loans, declined over the course of 2003 to an average of 6.8% at year end from 8.1% at the beginning of the year. And many CDOs remain close to their limits on single industry exposure and may need to sell out of existing chemicals transactions, many of which are underperforming, in order to invest in new deals in 2004.