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Diversified Industrials: Horizons

Digitalization. Complex supply chains. Growing regulation and compliance. Conglomerates and industrials operate in an increasingly dynamic environment – one which requires creative solutions and forward thinking.

The automotive recession won’t spare chemical companies

By Patrick Ayad, Heiko Tschauner, and Richard Wynne

Even before COVID-19 hit the U.S. and EU, traditional auto giants were, as the Wall Street Journal wrote back in February, “girding for tougher times” – battling drops in sales and a demand shift toward electrification. Now, with the industry over a trillion dollars in debt, it’s even more critical – and daunting – for such companies to “manage the slowdown at the same time that they invest billions in electric and self-driving cars.”

These disruptions won’t spare chemical companies either, who, not unlike their auto counterparts, now face the twin challenge of reducing debt and investing in new, lighter- weight materials.

In this environment, chemical executives should take steps to manage the liabilities on their balance sheets. They should adopt a holistic approach, anticipating possible covenant breaches and defaults, assessing different methods for refinancing debt (e.g. converting debt to equity, exchange offers), and shedding non-core assets. In the EU, a new preventative restructuring framework – which enables those in crisis to restructure without filing for bankruptcy – may become a powerful instrument for helping chemical companies navigate through a downturn.

Executives anticipating the possibility that they will be forced to reduce their workforces should also be cognizant of developments in worker protection laws. While the U.S. is more flexible than countries like Germany or France in this respect, the “Toys R Us” bill passed in New Jersey this year may signal broader shifts in legal protections for downsized U.S. workers. The law guarantees severance pay in the wake of mass layoffs.

In the end, most restructurings in the chemicals space will likely focus on converting assets to collateral – it’s in everyone’s best interest, after all, to keep these companies afloat. But as an automotive recession unfolds, the industry has a long road ahead of it. Those who take proactive, holistic measures to manage their liabilities will fare best in the years to come.

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