Reliance Industries (RIL) seems to be playing its cards brilliantly or ruthlessly — depending on which side one is on — in its bid to take over LyondellBasell.
The world’s third-largest petrochemicals giant based in Rotterdam, The Netherlands, which had liabilities of more than $30 billion and assets of around $21 billion according to its filing at the end of September, faces a liquidation deadline of December 15.
RIL is aware of the precarious perch the company is in and hence its opportunistic cash-bailout-for-control offer, which, at best, may cost $11 billion, sources said.
RIL is also known to drive extremely hard bargains. Hardballing of suppliers and specially suited consultants to its refinery megaplex are industry legion.
According to the terms of the emergency loans taken by LyondellBasell in March after it entered into Chapter 11 bankruptcy protection in January, it is due to pay back about $7.9 billion of short-term, high-priority loans by December 15 or face liquidation.
Meaning, any takeover would hinge on paying off that debt first.
Lyondell has been able to raise the money through Bank of America, RBS and Citigroup. The debtor-in-possession or DIP financing had three components, point out Jal Irani and Amit Mishra of Macquarie Research in a recent note: $3.25 billion in new money, $3.25 billion ‘roll-up’ from pre-bankruptcy senior debt and a $1.65 billion loan against assets.
The first step seems to be the $3.25 billion rights issue that Lyondell is offering its creditors, proceeds of which will go to the three banks.
As part of its offer, RIl may sponsor the rights.
According to the September monthly operations report of the company, it had already taken $5.4 billion from senior debtors — loans that enjoy priority over all other debts and obligations.
Now there are only two ways LyondellBasell can escape liquidation without RIL: One, have its recast plan approved by harried creditors, or, second, find even more loans or term extensions, which is very improbable considering the mountainous debt.
Apart from the $7.9 billion priority debt, LyondellBasell has nearly $22.2 billion under “liabilities subject to compromise” — mostly comprising long-term debt taken by the company before it filed for bankruptcy protection.
The figure also includes regulatory charges, employee benefits etc, all of which are expected to be paid only in part.
The game, thus, will revolve around how much of a haircut this group of creditors is ready to take.
Expect RIL to drive a ruthless bargain, say observers, because creditors have little option with no other bidder in sight.
“We need to sit and talk with the creditors and see how far they are willing to adjust,” pointed out an RIL source.
A Mumbai-based analyst said $10-11 billion may be a good estimate for the amount RIL will ultimately have to shell out.
“The bankruptcy court will ultimately choose the scheme under which the creditors get the maximum money back, either immediately or through an assumption of debt for future pay-back,” the analyst said, requesting anonymity as he was not authorised to speak to the media.
“A lot depends on whether creditors are happy taking IOUs from RIL or whether they would rather have the company sold piece by piece and recover a substantial share of what it owes to them,” he said, saying the company’s assets are still worth more than $21 billion on paper.
For example, the company’s plant and machinery are valued at close to $10 billion, while its investments in non-bankrupt units are valued at $5.2 billion.
“Ultimately, we are likely to see any successfull proposal by RIL to be a mix of cash and assumption of debt [to be paid back later] if we are talking about a range of $8-11 billion cash,” he said.
RIL and Lyondellbasell had said on Friday that the initial offer is “for cash”, rather than a blend of cash and debt.
The Dutch company said it will evaluate all the options before deciding.
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