Chemical maker Lyondell sees debt reduction as part of winning formula

By Paul Deckelman

New York, March 18 - Lyondell Chemical Co. believes that with the economy showing signs of gradual improvement it is "positioned for the cyclical upturn."

That was the title of the Houston-based chemical manufacturer's presentation Friday at the Lehman Brothers 2005 High Yield Bond and Syndicated Loan Conference in Orlando, Fla.

The company's chief financial officer, Steven DiNicola, told conference participants that continued debt reduction would be a key ingredient in what Lyondell hopes is a financially rewarding formula.

After detailing for the conference goers Lyondell's steady rise in earnings, defined by quarterly EBITDA, from the depths of the cyclical trough that reached its worst point in 2003, he rhetorically asked "so - what do we do with the money?"

Answering his own question, DiNicola said: "It's the same story" that the company has been saying for the last several years, i.e. pay down debt, "and it continues to be the same story, except that now we're able to do that," powered by both the steady gains its total business has shown since the dry spell in early 2003 - consolidated EBITDA rose to some $500 million in the 2004 fourth quarter, versus about $100 million in the 2003 first quarter - as well as the impact of its full ownership, directly or indirectly, of Equistar Chemicals LP, with Lyondell's completion of its acquisition of its partner in the joint venture, Millennium Chemicals, and before that Occidental Chemical's stake.

"It's a lot easier to do this conference over the last three years and say you're going to pay down $2 billion of debt when you're earning $175 million or $200 million out of Equistar," he observed.

The full addition of Equistar leaves Lyondell as the third-largest chemical country in the United States, measured on a total revenues basis, with only Dow Chemical and DuPont bigger.

As of the end of 2004, Lyondell had consolidated debt of $7.6 billion, consisting of $3.9 billion of debt issued by Lyondell itself, $1.4 billion of debt issued by Lyondell's 100% owned Millennium Chemicals subsidiary, and $2.3 billion of debt issued by Equistar, which is 70.5% directly owned by Lyondell, with the other 29.5% of Equistar's equity owned by fully-owned Lyondell subsidiary Millennium. Another $400 million of bank debt is outstanding at Lyondell-Citgo Refining, a Houston-based joint venture owned 58.75% by Lyondell and 41.25% by Houston-based petroleum company Citgo, which in turn is a wholly owned subsidiary of Venezuela's state oil company, PDVSA. That bank debt is not included in Lyondell's consolidated debt calculations.

Expects to call 9 7/8% notes

Lyondell had previously staked out a goal of reducing its debt load by some $3 billion in the next few years. DiNicola noted that as part of that drive, Lyondell last year called for redemption $500 million of its $1 billion of outstanding 9 7/8% series B senior secured notes due 2007, in a series of redemption transactions at 104.938, which were completed in January.

"On May 1, the [redemption] premium on the remaining $500 million goes down to roughly half of what it was, so you might expect us to be calling debt after May 1."

After that, he said Lyondell next has its sights on $730 million of 9½% series C senior secured notes due 2008, "the next tranche that we can get to," once the notes become callable on Dec. 15. The company also expects to pay off $100 million of 9 3/8% ACC debentures coming due Dec. 15.

"When you add it all up, we actually had the ability to get rid of $1.3 billion of debt in 2004," the CFO continued. "You should understand that as we get that cash [from operations], this is where it's going, for debt repayment."

He said that the $3 billion of projected debt redemptions and buybacks consist of roughly $2 billion of Lyondell debt that the company considers "accessible," either through the regular call process or, if the debt is non-callable or has just a make-whole call provision, at maturity. On top of that, he said, the company is eyeing $500 million of Millennium debt and another $500 million at Equistar.

Schedule of redemptions

After the debt that becomes "accessible" as of Dec. 15 this year, the company's debt-redemption timetable envisions the repayment at maturity in 2006 of $150 million of Equistar 6½% notes coming due on Feb. 15 of that year and $500 million of Millennium 7% senior unsecured notes, also due 2006.

For 2007, Lyondell plans to redeem $900 million of 9 5/8% series A senior secured notes at their maturity on May 1 that year, and will redeem its $278 million of 11% series D senior secured notes due 2012 and $700 million of Equistar 10 5/8% senior notes due 2011 when both become callable.

And in 2008, it plans to redeem $700 of maturing 10 1/8% senior notes and $485 million of Millennium 9¼% seniors.

"If the cash flow is stronger," DiNicola declared, "we're going to pay down more debt.

"We did a lot of the expansion we needed to at the trough of the cycle. We took care of all of the operating requirements as far as maintenance is concerned . . . so we don't have a big need to do a lot [of capital expenditure], so we're in a situation where the primary thing to do - is pay down debt."

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