American credit market outlook

Chemical companies including Nova Chemicals Corp and Chemtura Corp are facing maturing bonds at a time when declining earnings and cash flows are pushing them close to breaking terms in their bank loan agreements. If banks play hardball and refuse to fund the repayment of the bonds as they negotiate broken loan terms, the companies may need to sell assets or find other sources of funding in order to avoid a default.
Chemical companies are in decline as demand from traditional buyers of their products in the homebuilding and auto sectors have dried up. At the same time, new, low-cost competition is emerging from the Middle East, digging into their earnings and cash flows.
Banks, meanwhile, have been pulling back their exposures to risky companies and industries, and expensive financing is making it hard to make asset sales that could generate proceeds to repay debt. Nova Chemicals' bond maturing in April plunged 18 cents on Wednesday to 62 cents on the dollar on concerns the company would be unable to repay $250 million when it comes due.
The bonds recovered to 80 cents on Thursday, after the company said late Wednesday it has $575 million on hand and unrestricted access to its credit facilities. As earnings and cash flows remain under pressure, however, Nova may be close to breaking terms in its bank debt, which could restrict the use of those facilities.
The company said this month it was in discussions with its bank lenders to seek more flexibility in the loan terms. "A few days ago, unconfirmed rumours started circulating that negotiations weren't going well," Gimme Credit analyst Carl Blake said in a report on Thursday.
Chemtura's bank lenders have placed restrictions on its bank facilities that will impede the company's ability to use the loans to repay $370 million it has maturing in July. Chemtura said in a quarterly earnings statement in November that it intends to refinance the notes with "the issuance of new long-term financing or proceeds from the sale of assets."
"Should financial market conditions preclude a long-term refinancing prior to the maturity, the company will refinance the notes from other sources of liquidity including utilising its existing $750 million senior credit agreement that is not due until July 2010," the company added. A waiver and amendment to its loan facilities in December, however, may mean that is no longer possible.