Business torrents

Financing falls apart • $2 billion proposal has become too much for potential lenders. Company will remain in Bankruptcy • After four years and a major reorganization, Solutia hoped to get out.

Solutia Inc. said Wednesday that its hope of emerging this week from a 4-year-old bankruptcy reorganization was dashed by the storm roiling U.S. financial markets.

The company, based in Town and Country, learned Tuesday that the banks that had committed to providing it with $2 billion in financing may be backing out of the deal. Citigroup Global Markets Inc., Goldman Sachs Credit Partners LP and Deutsche Bank Securities Inc. said they have been unable to find lenders for the company’s financing, according to a Solutia press release.

Under a loan syndication deal, the lead banks put up part of the money and find other lenders to finance the rest of debt.

If the company ultimately cannot secure sufficient financing, it will be unable to complete the plan of reorganization it hammered out over years of often-contentious negotiations with stakeholders. Likewise, if a renegotiated financing package carries significantly worse terms, Solutia might have less to offer its debtors and could be forced to reopen the reorganization strategy.

Spokesman Dan Jenkins said Solutia is continuing to negotiate with the banks.

In a statement, President, Chairman and Chief Executive Jeffry Quinn said, "While we disagree with the position asserted by the (banks), we intend to continue to work with them to successfully syndicate the exit facility."

Solutia has debtor-in-possession financing in place through March 31 to fund ongoing operations while in reorganization. That package could be extended, if necessary, Jenkins said.

"We have operated in Chapter 11 for more than four years now and, throughout that process, we’ve continued to meet our financial targets. And, frankly, we’re quite good at it," he said. "While this is certainly disappointing, it’s something that … we know our employees are going to take in stride and they’ll continue moving forward with our business."

The turn of events is "pretty unusual," said Kyle Laughlin, head of chemical coverage for Standard and Poor’s Ratings Service. "This doesn’t happen every day in the capital markets. It’s a reflection of how uncertain things are."

The ratings agency will wait and see how Solutia proceeds, he said. If terms of the reorganization should change, Laughlin will reassess his ratings on the company’s debt.

While in bankruptcy, Solutia aggressively restructured its business quick payday. It shed unprofitable units, expanded high-performing product lines, and took measures to insulate itself from spiking energy and raw material costs.

"Solutia has really battled like crazy to come out as a new company. Still, it gets sidelined like this. … It’s almost certainly the ripple effect, or the tsunami effect, of this credit crisis" in U.S. markets, said Joseph Schlafly, senior vice president of Stifel Nicolaus & Co.

Financiers are breaking up deals, even when they have to pay termination fees, in order to deal with a backlog of hundreds of billions of dollars in debt, he said.

In Solutia’s case, the banks are citing a clause that allows them to back out of the deal due to "any adverse change … in the loan syndication, financial or capital markets generally" that impairs their ability to sell the debt, according to regulatory filings.

The deal was struck on Oct. 25 — and the markets clearly have deteriorated since then, said Scott Colbert, director of fixed income at Commerce Bancshares Inc. Lenders are setting steeper terms for the debt they take on and are entering into fewer deals.

"The market is so worried about credit risk these days," he said. "It’s really gummed up because people are scared."

Still, both Colbert and Schlafly expect Solutia will be able to obtain financing.

"They’ll get the money," Colbert said. "But they’re not likely to get as much loan, and it will cost more."

Schlafly said his "best guess" is that debt negotiated now will cost between two and three percentage points more than it would have in October.

When it secured a financing commitment from the banks, Solutia said it expected to emerge from bankruptcy by the end of last year. But the company was hung up in a dispute with bondholders that was settled just last week. Management late last year also was on a roadshow to promote its exit debt to potential syndicators, in hopes of stirring up interest.

"If they’d just exited bankruptcy four months ago with their package, they’d have made it. But today is different," Colbert said.

Solutia is back in the situation of having to balance living with the terms it can get now, with hopes that the market will improve in the near future.

Senior management will have to decide "is it going to get better in a month, or worse? And that’s not easy," he said.

rmelcer@post-dispatch.com | 314-340-8394

Source