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Standard & Poor's recently adjusted its outlook on the chemical industry, citing a more cautious stance due to several macroeconomic factors. These include slower GDP growth forecasts, a weak housing market, and persistently high oil prices. As of now, more chemical companies have seen their credit ratings downgraded this year than upgraded, and this trend is expected to continue through the remainder of 2007 and into 2008.
According to S&P, aggressive acquisitions and increased shareholder returns are key drivers behind the downward pressure on credit ratings. However, an extended industry cycle could potentially support credit improvements. Analysts noted that while chemical companies have maintained strong profitability in recent years, their credit quality has steadily declined. Out of the 75 chemical firms rated by S&P, 68% are currently classified as speculative grade, with the number of investment-grade companies dropping from 27 in June 2006 to just 24 today.
S&P attributes the decline in credit ratings primarily to overly risky financial strategies. Companies like Rohm and Haas and PPG Industries have been particularly affected. After Rohm and Haas announced a $1 billion stock repurchase program in July, its rating was downgraded. Similarly, PPG’s $3 billion acquisition of SigmaKalon Group led to its placement on a negative credit watch. The debt incurred from this deal is expected to significantly weaken PPG’s financial position. Additionally, Basel and Leonard Chemicals are also under review due to Basel’s $12.7 billion acquisition of Lionel.
On a more positive note, S&P remains optimistic about specialized and diversified chemical companies. This year, it has upgraded the credit ratings of Airgas, Hercules, and OM Group, citing improved financial health. Analysts believe the credit crisis that began in July may slow down M&A activity in the sector. S&P notes that private equity firms, which have been active in chemical M&A this year, will be most affected by any slowdown. If private equity reduces its pace, strategic investors and major players like Dow Chemical and DuPont may step in to drive future deals.