Oct. 31 (Bloomberg) -- A New York judge rejected Hexion Specialty Chemicals Inc.'s request to force two banks to extend their financing commitment for its $6.5 billion takeover of Huntsman Corp.

State Supreme Court Justice Eileen Bransten in Manhattan disagreed with Hexion's claim that it would suffer ``irreparable harm'' if Credit Suisse Group AG and Deutsche Bank AG didn't leave the funding agreement in place beyond tomorrow's deadline.

Hexion, controlled by New York private-equity firm Apollo Global Management LLC, is locked in a legal battle over its acquisition of chemical maker Huntsman. The banks' refusal to fund the July 2007 deal, which was announced before the credit freeze and looming U.S. recession, has led the group to consider a new transaction at a price less than the original $28 a share.

Huntsman fell $3.55, or 26 percent, to $10.10 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has dropped 61 percent this year.

Hexion believes it may be able to force the banks to fund the Huntsman deal even after the expiration date, Bransten said, citing Marc Kasowitz, a Hexion lawyer. Hexion sued the Credit Suisse and Deutsche Bank units on Oct. 29, asking a judge to order them to ``fulfill their obligations to finance the merger.''

Hexion agreed last year to buy The Woodlands, Texas-based Huntsman, the world's biggest maker of epoxy adhesives. The transaction was delayed by legal disputes over financing and was scheduled to be completed Oct. 28.

``All of the time Hexion could have moved, could have done things well in advance of the Nov. 1, 2008, deadline,'' Bransten said today following a hearing. ``If Hexion had done so, it would have eliminated the urgency to do something today.''

Insolvency Claim

The banks notified Hexion of their decision on Oct. 27, the Columbus, Ohio-based company said in a statement. Credit Suisse, based in Zurich, and Deutsche Bank of Frankfurt rejected a solvency opinion by American Appraisal Associates Inc. and a certificate signed by Huntsman's chief financial officer.

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

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

Pursue Claims

On Oct. 21, Hexion lost a bid to extend the period during which the buyout must take place. Hexion on Oct. 27 filed an appeal of Lamb's September ruling in Delaware Supreme Court.

``We will continue to pursue our claims for damages in both Delaware and Texas,'' said Russ Stolle, a Huntsman spokesman. ``Whatever the status of Hexion's arguments versus the banks, we believe Huntsman has been harmed by both Hexion's and the banks' actions.''

Hexion said that in the July 11 commitment letter, the banks each agreed to provide 50 percent of the following debt: an $8.4 billion senior secured term loan facility, a $5.95 billion bridge loan and a $1 billion revolving credit facility. Hexion said that the commitment letter also provided for a `termination facility'' if the merger didn't close, with the banks agreeing to finance Hexion's $325 million termination fee to Huntsman.

Back to Court

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

Kasowitz said Hexion won't seek an appeal of today's decision and will return to court Nov. 3 to ask Bransten to order the banks to fund the merger. Kasowitz argued that Hexion believes the banks are obligated to provide the financing even after the commitment letter expires.

Richard Clary, a lawyer for the banks, told Bransten that the banks don't accept that argument.

The case is Hexion Specialty Chemicals Inc. v. Credit Suisse, 114552/2008, New York State Supreme Court (Manhattan).

To contact the reporters on this story: Patricia Hurtado in Brooklyn, New York, at pathurtado@bloomberg.net.

Last Updated: October 31, 2008 16:41 EDT