Dec. 29 (Bloomberg) -- Dow Chemical Co. plunged the most in at least 28 years and Rohm & Haas Co. tumbled after their $15.4 billion merger was threatened by the collapse of a deal between Dow and Kuwait that would have provided some of the funding.

Midland, Michigan-based Dow, the biggest U.S. chemical company, declined $3.60, or 19 percent, to $15.32 at 4:15 p.m. in New York Stock Exchange trading, the largest drop since July 1980, when Bloomberg data on the company begins.

Rohm & Haas fell $10.22, or 16 percent, to $53.34, the largest decline since July 2000. The Philadelphia-based company rose 64 percent after Dow Chemical’s $78-a-share offer on July 10 and lost 10 percent this month in New York trading before today.

Kuwait’s withdrawal from the purchase of a $9 billion stake in Dow’s plastics unit may cripple Chief Executive Officer Andrew Liveris’s plan to cut his company’s reliance on sales of basic chemicals and plastics. It may also leave Rohm & Haas shareholders in the lurch. Dow has previously said it can complete the $15.4 billion Rohm & Haas deal without the Kuwait proceeds.

Without funds from Kuwait, though, financing for the Rohm & Haas takeover “would be difficult to come by in a tight credit market,” Hassan Ahmed, a New York-based analyst at HSBC Securities, said in a telephone interview from Lahore, Pakistan.

Both Standard & Poor’s and Moody’s Investors Service lowered their credit ratings for the chemical maker after the close of regular trading in New York.

Rating Cut

“Without the joint-venture cash, Dow debt could be downgraded to junk,” Gene Pisasale, who helps oversee about $13 billion at PNC Capital Advisors in Baltimore, said in a telephone interview. Dow’s debts “could be bouncing up against covenants” with creditors limiting how much the company owes relative to its operating revenue.

Dow’s credit rating was cut to BBB from A- by Standard and Poor’s, according to a statement from the ratings company. S&P said it based the decision on the collapse of the Kuwait deal, which would have helped pay for the Rohm & Haas purchase.

Moody’s cut Dow’s one grade to Baa1 from A3, the seventh- highest investment grade, citing Kuwait’s announcement to cancel its $9 billion investment to fund the acquisition of Rohm. Moody’s also kept the company under review for further possible downgrade.

“The issues prompting the downgrade increase the likelihood that Dow’s credit profile would be weaker than previously anticipated and its ratings could fall below the Baa2 rating in a worst-case scenario,” Moody’s said.

Dow’s 6.125 percent notes due in 2011, its most actively traded security including all trades, rose 1.6 cents on the dollar to 103.8 cents as of 12:50 p.m. according to Trace, the bond price-reporting system of the Financial Industry Regulatory Authority.

Planned Financing

Liveris had planned to fund the takeover of Rohm & Haas with a $13 billion bridge loan, a $3 billion equity investment by Warren Buffett’s Berkshire Hathaway Inc. and a $1 billion investment by the Kuwait Investment Authority. Dow needed only about $5 billion of the bridge loan assuming the Kuwait proceeds, Chief Financial Officer Geoffery Merszei said Oct. 23 on a conference call.

The one-year bridge financing is led by Citigroup Inc., Merrill Lynch & Co., and Morgan Stanley, each of which agreed to lend $1.35 billion. Bank of America Corp., Barclays Plc, Deutsche Bank AG, HSBC Holdings Plc, Mizuho Financial Group Inc., Royal Bank of Scotland Group Plc, and Mitsubishi UFJ Financial Group Inc. agreed to lend $950 million each. Nine other banks pledged lower amounts.

‘Not A Closing Condition’

Rohm & Haas said in a statement today the aborted deal “is not a closing condition for the proposed merger” and that it “continues to work diligently towards completing the proposed transaction with Dow in early 2009.”

Dow is likely “talking to Kuwait and to Rohm & Haas, trying to adjust terms and/or raise cash to see if they can move forward in whatever way,” Pisasale said. “Kuwait has strong ties to the West and existing joint ventures with Dow, so we feel Kuwait will try to make some adjustment so that a renegotiated deal can go through.”

Dow may eventually offer to buy Rohm & Haas for less than $70 a share, Deutsche Bank AG said in a research report today.

Rohm & Haas spokeswoman Emily Reilly declined to comment beyond the company’s statement earlier today.

Kuwait Politics

The Kuwaiti government has been under pressure from opposition lawmakers to scrap its deal with Dow, which they said was overpriced. Some members of parliament threatened public questioning of Prime Minister Sheikh Nasser al-Mohammed al-Sabah, a nephew of Emir Sheikh Sabah al-Ahmed al-Sabah, Kuwait’s ruler. They said the investment was too large at a time of falling oil prices.

Crude-oil futures in New York have dropped more than 70 percent from the record $147.27 a barrel in July on signs that a deepening global recession is cutting demand for fuel and energy. Oil reached a four-year low of $32.40 on Dec. 19.

“While the external environment for commodity petrochemical operators has deteriorated rapidly, we do consider the move curious in that it comes less than a month after Dow announced renegotiated terms of the deal,” Kevin McCarthy, a New York- based analyst at Banc of America Securities, said in a report today.

Price Reduction

Dow announced on Dec. 1 that it cut the original $9.5 billion price that Petrochemical Industries was to pay because of the weak economy and declining oil prices.

According to CMA Datavision, derivatives linked to Dow’s debt rose 90 basis points to 365 basis points as of 1:42 p.m. in New York.

Credit-default swaps are used to speculate on corporate creditworthiness or to hedge against losses. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should the issuer fail to adhere to its debt agreements.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

A decrease indicates an improvement in the perception of credit quality; an increase signals the opposite.

To contact the reporters on this story: Rob Delaney in Toronto at robdelaney@bloomberg.net; Jack Kaskey in New York at jkaskey@bloomberg.net.

Last Updated: December 29, 2008 19:19 EST