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Standard & Poor's recently revised its outlook on the chemical industry, signaling a more cautious stance due to several macroeconomic challenges. These include slower GDP growth projections, 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 analysts, aggressive business acquisitions and increased shareholder returns are key factors contributing to the decline in credit quality. However, the extended industry cycle could help stabilize or even improve credit ratings for some companies. The agency noted that while profitability has remained strong, credit quality has deteriorated over time. Out of the 75 chemical companies evaluated by S&P, 68% are currently classified as speculative grade, with the number of investment-grade companies dropping from 27 in June 2006 to 24 today.
S&P attributes the declining creditworthiness to overly risky financial strategies. Notable examples include Rohm & Haas, which saw its rating cut after announcing a $1 billion stock repurchase program, and PPG Industries, whose $3 billion acquisition of SigmaKalon Group led to a negative credit watch. The debt incurred from such deals is expected to weaken PPG’s financial position. Similarly, Basel and Leonard Chemicals are under review after Basel proposed a $12.7 billion acquisition of Lionel.
On a more positive note, S&P remains optimistic about specialized and diversified chemical firms. This year, it has upgraded the credit ratings of Airgas, Hercules, and OM Group, citing improved financial health. Analysts suggest that the credit crisis beginning in July may slow M&A activity in the sector. This slowdown could particularly impact private equity firms, which have been active in recent chemical transactions. If they reduce their pace, strategic investors and major players like Dow Chemical and DuPont might step in to drive future mergers and acquisitions.