Oct. 28 (Bloomberg) -- Credit Suisse Group AG and Deutsche Bank AG said they refused to fund the $6.5 billion buyout of chemicals maker Huntsman Corp. by a unit of Apollo Global Management LLC because the combined company may be insolvent.

The transaction, announced in July 2007 and delayed by legal disputes over financing, had been scheduled to be completed today. The banks notified Apollo's Hexion Specialty Chemicals Inc. of their decision yesterday, the Columbus, Ohio- based company said in a statement.

Lenders rarely pull takeover financing at the last minute. The banks last week lost an appeal of a court order barring them from filing lawsuits claiming the merged company would be insolvent. The seizure of credit markets has raised questions about whether the pending leveraged buyout of Canadian telephone company BCE Inc. for a record C$51.7 billion ($40.6 billion) will go through.

``It's a reflection of the greater chaos and risk aversion throughout the financial world,'' said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees more than $4 billion in assets. ``This doesn't have to do with the deal.''

Credit Suisse, based in Zurich, and Deutsche Bank of Frankfurt said they questioned whether the combined company would be solvent, rejecting an opinion by American Appraisal Associates Inc. and a certificate signed by Huntsman's chief financial officer.

``Aspects of the methodology, assumptions and depth of information utilized in the solvency analysis have left the banks with serious reservations,'' they said in the statement.

Deutsche Bank, Credit Suisse and Apollo expect the matter to wind up back in court, people briefed on the firms' plans said. Officials at the companies declined to comment.

Insolvency Argument

Apollo, the New York-based private-equity firm run by Leon Black and Joshua Harris, initially made a similar argument around the company's financial future. Huntsman sued Hexion in June in Delaware Chancery Court to meet the terms of their takeover agreement.

Judge Stephen Lamb on Sept. 29 sided with Huntsman that a slump in the chemical markets didn't give Hexion grounds to terminate the purchase and ordered the company to honor the agreement.

On Oct. 21, Hexion lost a bid to extend the period during which the buyout must take place. Hexion yesterday filed an appeal of Lamb's September ruling in Delaware Supreme Court.

The buyout firm has said it would commit $750 million to complete the deal, while Huntsman shareholders have committed $677 million.

Those contributions equal $6.12 a share toward Hexion's $28-a-share acquisition, said Laurence Alexander, a New York- based analyst at Jefferies & Co.

``While recent judicial rulings have favored Huntsman, the timing of a deal closing remains uncertain,'' Alexander said in a report. He rates the shares ``hold.''

Combined Company

Huntsman dropped 2 cents to $11.98 as of 12:12 p.m. in New York Stock Exchange composite trading. The shares fell 53 percent this year through yesterday.

The combined company would be one of the world's largest specialty-chemical makers, with annual sales exceeding $14 billion, 21,000 employees and 180 facilities, according to Apollo. Hexion is the top producer of adhesives used in plywood. Huntsman, based in The Woodlands, Texas, is the world's biggest maker of epoxy adhesives.

The Huntsman situation may signal trouble for the buyout of BCE by a group of investors led by Ontario Teachers' Pension Plan, said Sachin Shah, a merger arbitrage analyst with ICAP Corporates LLC.

That transaction is set to close by Dec. 11 after negotiations with banks earlier this year delayed the deal's completion. BCE's shares have been trading below the C$42.75-a- share offered by the investor group amid speculation of further negotiations with the banks.

``LBOs the size of BCE announced on terms so long ago have surely more risk,'' Shah said.

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Jack Kaskey in New York at jkaskey@bloomberg.net

Last Updated: October 28, 2008 15:17 EDT