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French chemicals company Rhodia is facing a liquidity crunch. Under a deal struck with its banks last December, it needs to raise e300 million in a rights issue by May 15 to access a new loan. Its finances have worsened since then. It has paid e295 million to bondholders threatening to tip it into default. And its access to credit backed by uncollected invoices has reduced, forcing up the debt held on its balance sheet by more than e200 million last year.
It now looks as though Rhodia will have to raise rather more than e300 million to keep the wolves from its door. The group has acknowledged that this is the case, but denies it will need as much as e600 million. But just look at its available liquidity and the likely drains on it. The company has e766 million in cash and marketable securities. It has also promised to raise at least e700 million by selling two divisions – phosphates and food additives. This may not be easy in current markets but assume it hits this target. Then add on an extra e300 million from the rights issue, assuming it completes one, and the company will have e1.8 billion of liquidity in total.
In the meantime, Rhodia must repay banks, bondholders and other creditors e560 million this year and e500 million next year. It must also replace ageing plant. Capital expenditure shrank to e233 million last year, probably as low as it can go. It was more than twice as high before Rhodia's capital crunch hit. It also plans to boost operations in China to access growing markets and cheap labour. This will require further spending. If capital expenditure rises to, say, e300 million a year, this is another e600 million over two years. Total outlays: e1.7 billion, leaving the company with a liquidity buffer of just e100 million.
But that's not all. Rhodia has promised to generate e245 million in annual cost savings by 2006. That will mean taking up-front restructuring charges that could be at least as big as this figure. On top of all this, the company is forecast to lose e200 million after tax over the next two years before benefits of its restructuring flow through. Adding these forecast figures to its outflows could mean Rhodia would need e350 million of extra cash, albeit spread out over two years.
Some of the group's profit problems appear temporary. A weak dollar, high prices for raw materials and poor economic growth are all biting. A turnround in these trends could alleviate some of the pain. But there are also more worrying reasons for the expected losses.
One is that Rhodia has sold its food additives division and plans to sell its phosphates division. But these two provide an outsize contribution to profits – about 11% of group sales – but they are estimated to produce up to 20% of ebitda. Another is that some of Rhodia's remaining businesses appear to be in decline, particularly the nylon and pesticides/drugs units, which together contribute 30% of group sales.
Perilous markets Sales of chemicals for pesticides and drugs have fallen by more than a third in the past quarter alone. In drug making, competition based in India, where production costs are around half of those in the west, is taking its toll. Nylon sales fell 8% last year, owing to excess capacity in developed markets. Rhodia's plans to expand in China are intended to soften these blows. But its lack of capital will restrain its ambitions.
Rhodia has been looking for an underwriter since December and appears not to have found one so far. As a last resort its lending banks such as Société Générale and Paribas might agree to underwrite a bit more than e300 million of equity. That would provide a buffer against their existing credit exposure.
But Rhodia clearly needs more than e300 million – possibly twice as much, if it wishes to pre-fund itself for two years. This will be difficult to raise, not least since its market cap is only e630 million. Ideally, it would refinance more of its debts. However, its banks are unlikely to volunteer. They effectively get to reduce their exposure by a quarter via the refinancing deal announced in December. Meanwhile, Rhodia bondholders feel burnt. They bought a big high-yield issue last May, only to see it collapse in value just weeks later, when a huge profit warning appeared. Rhodia's best bet for funding would probably be via a convertible bond, aimed at investors that can hedge away their credit exposure.
Of course, when troubled companies do pull off a big refinancing, the pressure taken off the balance sheet can cause a rally in their stocks and bonds. That's what happened to UK engineering group Invensys last month. But Invensys's businesses don't seem threatened by structural decline. Rhodia is unlikely to go bust – not least because the French government is interested in its survival. But it looks as if banks and investors will have to share more pain before recovery comes.
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