03 April 2009

Dow Chemical's Debt Rating At Issue

As Originally Posted at the Wall Street Journal

Dow Chemical Co. is set to buy rival Rohm & Haas Co. Wednesday, starting the clock on its efforts to pay for the $16.3 billion purchase.

But with the outlook for the chemicals industry glum, investors are waiting for Dow to provide more details on how it will repay the about $10 billion in debt required to complete the purchase.

"As of April first Dow will be a highly leveraged company in a very challenging economic environment," said David Begleiter, a chemicals analyst with Deutsche Bank Securities.

Weak demand for chemicals and plastics is battering even companies with relatively little debt. On Tuesday, debt-rating company Fitch Ratings changed its outlook on rival DuPont Co.'s credit rating to "negative" from "stable," saying the chemicals sector won't brighten in the next 12 to 18 months.

Midland, Mich.-based Dow must provide detailed plans for repaying its debt to keep its investment-grade credit rating. Moody's Investors Service said it could reach a decision on that rating by today, and Standard & Poor's has said it will decide "soon."

The chemical giant Tuesday said it continues to examine ways to raise cash and reduce the debt burden. Earlier this year it cut its annual dividend by 64%, saving about $1 billion a year. The company has said it plans to issue up to $5.4 billion in new securities and raise about $4 billion from asset sales, including Rohm & Haas' profitable Morton Salt unit.

Andrew Liveris, Dow's chief executive, has said the company has received more than six bids for Morton Salt and expects it to sell for more than $1.5 billion. The company Tuesday declined to comment on the status of the negotiations. It has said it plans to sell stakes in a Dutch oil-refining complex and a Southeast Asia petrochemicals business.

To conclude the purchase of the specialty chemicals maker, Dow will use up to $7 billion from investors and up to $10 billion from a loan that must be repaid in the next two years.

Dow intends to use assets sales to help pay back the short-term loan. The salt business is a rare bright spot in the otherwise gloomy chemical sector due to a string of bad winters that has dwindled supplies of the salt used to de-ice streets and sidewalks.

But selling other assets will probably be tougher due to tight credit conditions and the trough in the business of making commonplace chemicals and plastics.

The company's shares Tuesday were up 13 cents at $8.43 in 4 p.m. composite trading on the New York's Stock Exchange. The stock is about 74% below its level last July, when the Rohm & Haas deal was struck.

Dow was in a very different position then. The company was counting on $9 billion from selling a stake in some of its plants to a Kuwaiti company when it agreed to pay a 74% premium for Rohm & Haas.

But the Kuwaiti joint venture fell through in late December under pressure from the Kuwaiti government, and business in the chemical sector soured due to the economic recession.

Dow reneged on the merger, saying it would be financially disastrous for both companies, and Philadelphia-based Rohm & Haas sued. The two parties settled their dispute in March after Dow extended the terms for a portion of its short-term loan from one year to two years, and two major Rohm & Haas shareholders agreed to invest up to $3 billion in the combined company.

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