Lyondell Chemical Company – Case Solution

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Lyondell Chemical Company Case Answers

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1. Did LyondellBasell (Lyondell Chemical Company) have no choice but to place its U.S. operations and its German subsidiary under Chapter 11 protection? What other options might management have reasonably considered?

LyondellBasell (Lyondell Chemical Company), a chemical company and one of the world’s largest, needed substantial amounts of funding. The credit market was dried up, banks were unwilling to lend, and the credit spreads were at all-time highs. Hence, DIP financing through Chapter 11 protection appeared to be the only feasible source of funding at that time.

An out-of-court restructuring or renegotiation would, therefore, not provide them with any additional funds. Management might have considered asset sales, e.g., selling its European business and focusing on its US operations. However, such a fire sale might result in significant discounts. Moreover, the operations might be tightly linked and difficult to carve out.

A complete sale of the company could also be considered by the management of Lyondell Chemical Company. Yet, the company itself is among the market leaders in terms of size, making it difficult to find a potential acquirer.

Another option might have been to request funding from the ultimate parent company, Access Industries, and its owner. However, Access Industries already denied them drawing down $750m under their existing credit facility.

2. Do you agree with the company’s decision to seek Chapter 11 protection for only a subset (but not all) of its businesses?

Basically, nearly 96% of the total debt is owed by the Lyondell Chemical Company’s US and German entities. The remaining entities are not directly in financial distress, and the operations are running fine.

Putting these entities under Chapter 11 protection would just increase the size, complexity, and hence the costs of such a proceeding, which demands additional cash that is not available. Moreover, the entities would have to unnecessarily bear significant costs of financial distress (loss of customers & suppliers, etc.).

Additionally, by not including those entities in a Chapter 11 filing, the owner limits his risk of losing control over those entities in a potential restructuring that may involve equity awards for creditors.

Furthermore, by not including them, the liquidation value of Lyondell Chemical Company is significantly lower while debt only decreases by 4%, making rehabilitation more desirable than liquidation from the court’s perspective, which is in the interest of Lyondell.

However, one might consider that in the case of the subset of companies included in the filing being a significant part of the supply chain of the left-out companies, Lyondell Chemical Company risks significantly destroying value in case of liquidation as an outcome of the bankruptcy process. As liquidation is a highly unlikely scenario, we agree with the management’s decision.

3. Ignoring the objections of ABN AMRO and the unsecured creditors’ committee, what general arguments would you make to Judge Gerber to persuade him to approve the DIP financing facilities? What analysis or evidence can you provide to support your arguments? (If your analysis entails a valuation, please focus on valuing LyondellBasell, the parent company, on a fully consolidated basis.)

Note: Please assume the following:

• Lyondell Chemical Company operations have an asset beta of 0.95, and its refining operations have an asset beta of 1.35; its expected marginal tax rate is 35%; its target leverage ratio (D/V) after bankruptcy is 40% (consistent with an ‘A’ credit rating), and the market risk premium is 6%.
• In a liquidation, realization rates for property, plant, and equipment would be 25% of book value, and for accounts receivables and inventory, 50% of book value. These figures are before transaction costs, which would be 7.5% of total assets (book value).
• LyondellBasell’s European operations that are not part of the Chapter 11 proceeding account for 40% of the consolidated company’s enterprise value and liquidation value.

As mentioned before, it is difficult, if not impossible, to find another source of funding at the moment, which is crucial for Lyondell Chemical Company to survive. Any new lender would require superior security, which requires priming the DIP lenders’ claims to get this sort of funding.

Lyondell Chemical Company is clearly worth more on a going-forward basis than in a liquidation, which could be a potential outcome in case the DIP financing will not get approved. The company is dealing with liquidity issues rather than solvency issues, as there are significant assets exceeding debt.

Moreover, the current unfavorable economic environment in terms of demand, credit markets, and increased commodity prices can be viewed as temporary and may improve over the long run.

Lyondell Chemical Company would be valued at around…