Sabic set to refinance GE Plastics debt

18 July 2008
Saudi giant to change covenants as subsidiary struggles to meet cash projections in deteriorating market.

Saudi Basic Industries Corporation (Sabic) is seeking to refinance a portion of the debt associated with its $11bn acquisition of plastics manufacturer GE Plastics last year, in an effort to change some of the covenants linked to the debt.

The debt on the deal is held by Sabic Innovative Plastics (Sabic IP), a wholly-owned subsidiary of Sabic, and totals about $8.6bn, Saudi bankers tell MEED.

Earlier this year, Sabic said it would provide financial support to the subsidiary to ensure it complies with its financial covenants - the clauses in the debt agreements designed to protect the lending banks.

Following the acquisition of GE Plastics, a deterioration in the polycarbonates market left it struggling to meet the cash flow projections made at the time of the takeover. “Without parental support, [Sabic IP] would not meet its financial covenants in its senior credit agreement, nor would it have enough liquidity in the medium term,” says Tobias Mock, primary credit analyst at credit ratings agency Standard & Poor’s.

Saudi bankers say Sabic is considering using its core relationship banks to refinance a portion of the debt and replace some of the covenants that cover cash flow.

“It is unlikely that Sabic would be able to get any reduction in margin on the debt, but it could change some of the ratios it is having difficulty hitting and maybe reduce the debt size,” says one Riyadh-based banker. “It has vast liquid resources in other parts of the business that it could use to pay off some of the debt.”

The debt was arranged by HSBC and involved ABN Amro, Citigroup and JP Morgan as bookrunners. Any refinancing is expected to include the existing banking group, rather than going to the wider market.

The Sabic IP debt is split between a $1bn revolving credit facility, two term loans of $1.5bn and $4.6bn, and unsecured bonds of $1.5bn. The exact nature of the covenants on the debt has not been disclosed.

Mock says although Sabic IP is expected to remain cash flow negative for the next two years, the support from Sabic means the outlook for the company’s A+ credit rating is stable and Sabic’s covenants are unlikely to be breached.

In August 2007, Sabic cut its bond debt from $2.76bn to $1.5bn because of difficulties in the corporate bond market brought on by the credit crunch. As a result, it had to raise the size of its total bank debt to $6.6bn from $5.4bn.
Sabic could not be reached for comment on whether it is planning to refinance any of the Sabic IP debt.

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