Lyondell granted approval to post $10 million margin to allow physical trades

By Caroline Salls

Pittsburgh, Feb. 19 - Lyondell Chemical Co. obtained emergency court approval to enter into trading contracts and post up to $10 million of margin on an interim basis in connection with trades on Nymex that hedge physical sales transactions, according to a Thursday filing with the U.S. Bankruptcy Court for the Southern District of New York.

As previously reported, the company wants to pledge a total of $50 million of collateral on a final basis. The final hearing is scheduled for Feb. 25.

According to the motion, Lyondell has historically posted margin in the spot hydrocarbon market to permit it to enter into trades on the Nymex associated with crude and refined oil transactions while waiting for the physical exchange of products with counterparties.

Through this mechanism, the company said it sells refinery products for future delivery, while protecting against market fluctuations between the time it enters into a sale and completes the physical transfer of product.

Since it filed for bankruptcy on Jan. 6, Lyondell said it has been able to satisfy any margin requirements from funds that were already on deposit for this purpose.

However, the company said a pronounced drop in the price of hydrocarbons in recent days has eroded the amount of these funds.

If it is unable to post margin and enter into the Nymex trades, Lyondell said it is afraid that counterparties to physical exchanges will stop paying for physical trades and the effect will multiply until no one will buy the product.

To avoid these potential consequences, the company said it needs to be able to enhance the pledged funds that can be posted as margin.

Lyondell is a U.S. subsidiary of LyondellBasell, a Netherlands-based polymer, petrochemicals and fuels company. LyondellBasell's U.S. operations and one of its European holding companies filed for bankruptcy on Jan. 6. The Chapter 11 case number is 09-10023.

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