As the financial markets continue their protracted road to recovery, petrochemicals market observers have noted that leverage is no longer so daunting a word compared with late 2008 and 2009 in the aftermath of the financial crisis.
As a recent report from accountants PricewaterhouseCoopers noted, the volume of investments in the chemical sector decreased by 16% in Q1 2011 compared to Q4 2010, but the deal value almost doubled in the quarter compared with average quarterly activity last year.
As Neil A Burns, founder of the eponymous specialist chemical sector advisory company, told Platts in the last week: "Average debt multiples of leveraged loans on industrial companies for buyouts is up to 4.3 times EBITDA -- which is lower than the recent peak in 2007 of 4.9 times, but right in line with 2004-06 levels."
The downturn saw debt markets contract reducing M&A deal activity to about 10% of total activity -- from the pre-recession 15-20%, PwC said in its report. But, the firm added, an uptick in 2010 was partially driven by activity from bankruptcy emergence creditor transactions while in Q1 2011, financial investor activity has jumped to 23% of total activity.
Financing for mid- to large private equity investments [over $50 million] in the chemical sector have returned to the normal "pre-recession" levels.
As for lending terms, although there are some differences depending on whether it is an industrial player or a financial investor that is making the acquisition, it often comes down to the standalone merits of the target asset.
As Burns told Platts in an interview, "There are certainly differences between trade buyers and private equity groups, one obvious area being corporate guarantees, but the quality of the underlying asset is generally the major driver of loan pricing and availability. Otherwise, on average, high yield credit spreads (over the 10-year bond) on loans to the industrial sector are now almost back down to pre-recession pricing."
PwC's report noted that Q1 deal activity reflected several essential issues in the chemical sector, including strong balance sheets, healthy margins, and positive forecasts, not limited to any a particular segment in the industry. The firm added that, assuming that lending conditions continue to improve, strong financial investor deal activity in 2011 is expected to continue.
As Burns said: "For quality assets, lending is very readily available, and a borrower should expect to have healthy competition for his business." "Banks are very willing to lend and will compete hard to make loans to good quality companies. I think most lenders with chemicals experience have an eye on cyclicality of the petchem sector but are certainly not scared off by it....Banks view the recent capital discipline of the sector very positively," concluded Burns.
