The Financial Crisis, Credit Quality and the Outlook for M&A

Joseph ChangGlobal Editor

ISM Chemical GroupNew Orleans

February 12, 2009

1/6/09 LyondellBasell files for Chapter 11 bankruptcy in US

1/12/09 Tronox files for bankruptcy

1/21/09 Foamex misses interest payment, defaults on loan

Domino Effect

ICIS Petrochemical Index (IPEX)

Source: ICIS pricing

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Q4 2008 EPS Q4 2007 EPS Volumes

Dow Chemical ($0.62) $0.84 -17%

DuPont ($0.28) $0.57 -20%

NOVA Chemicals ($2.30) $1.00 -23%

Celanese ($0.38) $0.93 -26%

Source: Companies

Q4 Disaster

Temporary closure of 80 plants

Cutting production at 100 plants

20,000 employees “affected”

Closing 20 plants

Temporarily idling 180 plants

Cutting 5,000 jobs

Dismissing 6,000 contractors

Idling 100 plants

Cutting 2,500 jobs

Dismissing 4,000 contractors

Rapid Response

Out of 75 companies under coverage by Moody’s, 54, or 72%, are in the high-yield (junk) category (under BBB-), more than double the 26 at the end of 2001

Out of 69 companies covered by S&P, 43, or 62% of the group are rated junk. And 32 have ratings in the B+ to CCC- level, indicating very high leverage

North American chemical industry credit quality

A Heavier Debt Load

A Solvency Solution?Companies At Risk

Company Rating Notes

Chemtura CCC (S&P) Cut 3 notches on 1/22

INEOS CCC (S&P) Cut 2 notches on 1/23

Aventine Caa2 (Moody's) Equiv to S&P CCC

NOVA Chemicals CCC+ (S&P) Cut 3 notches on 2/2

Georgia Gulf CCC+ (S&P) Stock under $1

Arclin Canada B- (S&P) Likely covenant violation in Q1

Hexion B-, CW negative (S&P) Bonds trade in the teens

Kraton Polymers B- (S&P)

OMNOVA Solutions B (S&P) Stock under $1

Momentive B (S&P) Highly levered but lite covenants

MacDermid B (S&P) Late LBO

PQ Corp. B (S&P) Last big LBO in chemicals

Univar B2 (Moody's) Equiv to S&P B

PolyOne B+ (S&P)

Solutia B+ (S&P) Exposed to auto and construction

Huntsman BB-, CW negative (S&P) Apollo settlement helps

Source: S&P, Moody's, ICIS Chemical Business

Company LBO vintage Debt/EBITDA (LTM)

SABIC Innovative Plastics 2007 9.9x

Cognis 2004 9.0x

Hexion Specialty Chemicals 2004 8.8x

Momentive Performance Materials 2006 8.7x

PQ Corp. 2007 8.0x

MacDermid 2007 7.2x

LyondellBasell Industries 2007 7.0x

Brenntag 2004 6.4x

Kraton Polymers 2003 5.2x

INEOS Group 2005 4.8x

Source: Standard & Poor's

Leverage Ratios Will Get Higher

Majors/Diversified E2008 EPS E2009 EPS % Change Stock price* P/E (2009)

Dow Chemical $2.52 $1.63 -35% $13.44 8.2

DuPont $2.78 $2.18 -22% $24.71 11.3

Celanese $3.12 $1.82 -42% $12.09 6.6

Nova Chemicals $0.77 ($0.14) N/A $3.73 N/A

Huntsman $0.11 $0.08 -27% $2.84 35.5

Eastman Chemical $4.74 $3.13 -34% $28.74 9.2

Specialties E2008 EPS E2009 EPS % Change Stock price* P/E (2009)

Rockwood $1.83 $1.41 -23% $8.55 6.1

Nalco $1.04 $1.10 +6% $10.70 9.7

Cytec Industries $3.46 $2.94 -15% $22.45 7.6

PPG Industries $3.36 $3.94 +17% $40.91 10.4

FMC $4.44 $4.97 +12% $47.02 9.4

Albemarle $2.40 $2.35 -2% $23.00 9.8

Arch Chemical $2.27 $2.07 -9% $24.46 11.8

Ferro $1.22 $1.25 +2% $5.28 4.2

Lubrizol $4.09 $4.13 +1% $36.57 8.9

* As of the close of January 28, 2009Source: Yahoo! Finance, ICIS Chemical Business

Wall Street Crystal Ball 2009

NOVA Chemicals – $250m in bonds expiring April 1 and $126m in preferred shares maturing on October 31

– In talks with banks– S&P cuts rating to CCC+– Stock falls to under $2

Chemtura – $370m in 7% notes expiring July 15– Asset sales needed to repay debt– S&P cuts rating to CCC– Stock collapses to under 50 cents

Refinancing Risk

Investment-grade companies can still issue debt, but at a high cost

– Spreads vs. 10-year US Treasury at 6-9%

Lubrizol raises $500m in 10-year notes with 8.875% coupon – replaces 4.625% notes

Financing Market Not All Dead

EXTRA!!BUSTED

billion-

dollar deal

Dow Chemical’s $15.3bn ($78/share) cash acquisition of Rohm and Haas put on ice Dow refuses to close the deal by deadline

of Jan 27 after receiving antitrust clearance Rohm and Haas sues Dow in Delaware

court Dow stalls for time, negotiations under way Dow has $13bn bridge loan commitment

from Citigroup, Merrill Lynch and Morgan Stanley expiring on July 8, plus $3bn from Warren Buffet and $1bn from Kuwait Investment Authority

Ticking 8% fee means Dow’s purchase price rises by $3.35m/day, or over $100m/month. Maxes out at $500m

Renegotiated deal for lower price with a stock component the most likely outcome. Rohm and Haas stock trades at about $54

Busted billion-dollar dealApollo Management’s $6.5bn ($28/share) acquisition of Huntsman falls apart

Huntsman Sr. and Leon Black threw the lawyers out of the room and talked one-on-one

Settled in December 2008 for $1bn in cash ($750m in cash – no strings, plus $250m in cash from sale of Huntsman convertible notes to Apollo)

Huntsman settled for cash now versus multiple years of court cases

Huntsman will continue its lawsuit against Deutsche Bank and Credit Suisse for pulling the financing

Huntsman stock falls to under $3

Billion-dollar deals will become scarce until financing market recovers

Private equity hampered with no high-yield debt market

Strategic buyers focused on own restructuring, liquidity issues

Number of deals and dollar volume set to decline substantially

Small- to mid-size deals get done

M&A Outlook 2009

$ $

Distressed assets for sale

Falling valuations

Less competition from private equity AND financially strapped chemical companies

Financing still available for strong investment-grade companies

Companies monitoring developments closely

Crisis = Opportunity

Company Rating

DuPont A, Stable

Air Products A, Stable

Monsanto A+, Stable

PotashCorp A-, Stable

PPG Industries A-, Negative

Praxair A, Stable

Sherwin-Williams A-, Negative

Sigma-Aldrich A, Stable

Source: Standard & Poor’s

Pole Position

Sources: Young & Partners, ICIS Chemical Business

Private equity leveraged buyouts (LBOs) of chemical companies rise in 1999 and peak in 2005 at 36% of total M&A dollar volume. H1 2007 also hits 28% of deals and 36% of dollar volume.

Chemical M&A peaks in 2007 at $55bn in deals

Loose lending practices with covenant-lite loans

High leverage became more accepted

Stock buybacks liberally used as a tool to boost shareholder value

Recipe for Disaster

Wall Street and Management

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Source: Yahoo! Finance

No Tolerance For Leverage

Chemtura

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Source: Yahoo! Finance

NOVA Chemicals

Source: Yahoo! Finance

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Celanese

Source: Yahoo! Finance

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Rockwood Holdings

“Optimal capital structure” no longer optimal when cyclicality is taken into account

Companies, especially in cyclical industries, should not take on large amounts of debt

High leverage leaves you vulnerable in tough times – no longer in control of own destiny

Term out debt maturities!

Change in Attitude Needed

The benefitCan increase EPS in the short termCan prop up or increase stock price

The costFunds could have been used for debt

paydown, R&D spending, capital projects, acquisitions

Reduces financial flexibility in the inevitable downturn

Buyback Mountain

(ala shooting yourself in the foot, um, leg)

Stock Buybacks

Thank you!

Joseph ChangGlobal Editor

360 Park Avenue SouthNew York, NY 10010

(212) 791-4224joseph.chang@icis.com