Jan. 20 (Bloomberg) -- Ineos Group Holdings, Georgia Gulf Corp. and Chemtura Corp. are crashing on a mountain of takeover debt and may follow Lyondell Chemical Co. into bankruptcy, trading in their bonds shows.

The combination of $11.7 billion in debt, frozen credit markets and the global recession are forcing the companies to negotiate with creditors to loosen terms of their loans. A glut in supplies that drove prices of polypropylene down by half since October will make it even harder for plastics makers to meet debt payments, just as manufacturers in the Middle East add millions of tons of new supplies.

“The most leveraged names are the first ones that are going to run into problems,” said Andrew Brady, a New York-based analyst at CreditSights Inc. “The market knows they are struggling, and there is a huge risk of bankruptcy.”

Debt and derivatives of the companies are trading as if they are on the brink of bankruptcy. Bonds issued by closely held Ineos lost 90 cents on the euro, and credit derivatives priced in almost certain odds the company will default. Georgia Gulf bonds trade as low as 16 cents on the dollar.

Companies with below-investment grade ratings in the Merrill Lynch U.S. High Yield Master II Index trade at an average 64 cents on the dollar. Bonds rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's are considered non-investment grade.

Innovene Buyout

The struggle at Ineos, the world's third-biggest producer of polypropylene, used in plastic car parts and carpet fibers, can be traced to its debt-funded acquisition of BP Plc's Innovene unit for $9 billion in 2005, which quadrupled revenue and doubled its workforce.

Ineos's net debt was about 7.29 billion euros ($9.67 billion) as of Sept. 30, or 4.3 times earnings before interest, taxes, depreciation and amortization, or ebitda, Chief Financial Officer John Reece said in a Jan. 15 interview.

“That level of leverage is quite modest,” Reece said. “Prior to the credit crunch, four times leverage was considered pretty conservative.”

Ineos is “doing as well as any other chemical company,” he said.

Chemical makers made $27.3 billion of acquisitions in 2005, including Ineos's purchase and Chemtura's $1.73 billion buyout of Great Lakes Chemical Corp.

Chemical Acquisitions

Industry acquisitions doubled in 2006 to $56.3 billion, before slowing to $39.9 billion in 2007. The figure rose to $48.8 billion last year, mainly because of Akzo Nobel NV's purchase of Imperial Chemical Industries Plc for about $15.4 billion.

The tallies don't include billionaire Len Blavatnik's Access Industries Holdings LLC, which assembled the main pieces of LyondellBasell Industries AF SCA with the $5.7 billion acquisition of Basell BV in 2005 and the $12.2 billion purchase of Lyondell in 2007.

The companies expanded, loading up on debt, just in time for the recession that the National Bureau of Economic Research says started in December 2007. The financial crisis sparked by the collapse of subprime mortgages deepened in September as Lehman Brothers Holdings Inc. slid into bankruptcy, triggering the decline in the S&P 500 Index that made last year as the worst for U.S. stocks since 1937.

Auto Sales

Sales by domestic automakers, among the biggest users of plastics, plunged 18 percent last year to 13.2 million vehicles, and Citigroup Inc. and Goldman Sachs Group Inc. predict declines this year. New home sales in the U.S. tumbled in November by the most in two decades, hitting a 17-year low, the Commerce Department reported last month.

Prospects for the economy aren't improving, according to recent data. Output at U.S. factories, mines and utilities dropped 2 percent in December, after a revised decline of 1.3 percent in November that was more than double the previously reported decrease, the Federal Reserve said Jan. 16 in Washington.

The U.S. economy is expected to contract 1.5 percent this year, the average forecast of 60 economists surveyed by Bloomberg News. Moody's forecasts 15 percent of companies will default around the world this year, compared with its 10.4 percent estimate last month.

Stimulus Plans

To combat the slide, U.S. President-elect Barack Obama and Democrats in the U.S. House of Representatives proposed an $825 billion economic-stimulus plan to boost government spending and cut taxes for families and businesses. China, the biggest contributor to global economic growth, said in November it would spend $586 billion to boost its economy.

Chemical makers still will face a supply glut from the Middle East, where state-controlled companies such as Saudi Basic Industries Corp. are converting cheap petroleum into ethylene.

Nine new factories in Saudi Arabia, Iran, Qatar and Kuwait will boost global ethylene production capacity by 9.57 million tons, or about 7 percent, from early 2008 through the first half of this year, said Howard Rappaport, global business director for plastics at Chemical Market Associates Inc., a Houston-based consultant.

Prices for ethylene, the most-used petrochemical, plunged 43 percent in the fourth quarter from the third, said David Begleiter, a New York-based analyst at Deutsche Bank Securities. Polypropylene fell by 50 percent in the last two months of 2008, and the oversupply caused by the new capacity could last for three years, Begleiter said.

New Terms

With chemical demand sinking, Ineos won approval from 233 lenders last month to waive conditions temporarily on 5.18 billion euros in senior loans. The company also agreed to pay more interest and prepare a new business plan, to be released in late April. Debt can now rise to 5.25 times ebitda, up from 4.6 times, without violating covenants, Reece said.

Ineos is cutting costs to conserve cash and slashing capital spending this year by 58 percent to 250 million euros.

If chemical demand improves by the time Ineos presents its plan, investors may grant waivers and require some asset sales, said Jochen Schlachter, an analyst at UniCredit Research in Munich. If demand remains weak, Ineos may be forced into bankruptcy, he said.

“The fourth quarter is going to be disastrous,” Schlachter said. “Ineos is in a dire situation.”

Ineos Swaps

Credit-default swap traders are demanding 8.2 million euros upfront plus 500,000 euros a year to protect against default on 10 million euros of Ineos bonds for five years, according to London-based CMA DataVision. The upfront cost soared from 4.8 million euros two months ago. A year ago, it was 716,000 euros a year with no upfront payment.

Investors use credit-default swaps to hedge against losses or to speculate on a company's ability to repay debt. The contracts pay the buyer face value if a company defaults in exchange for the underlying securities or the cash equivalent.

Ineos's 7 7/8 percent notes maturing in February 2016 fell 1.5 cents on the euro to 10 cents on Jan. 16, Bloomberg data show. The yield rose to 83.5 percent from 74.5 percent.

The Jan. 6 filing for court protection from creditors by Houston-based Lyondell Chemical and U.S. affiliates of LyondellBasell of Rotterdam, Netherlands, came six days before Tronox Inc., the Oklahoma City-based pigment maker spun off by Kerr-McGee Corp. in 2006, filed for bankruptcy.

Maximizing Output

Chemical makers' finances may worsen if Lyondell increases output to generate cash, driving down prices on basic plastics and compounds, UniCredit's Schlachter said. A LyondellBasell subsidiary said last week it will restart an olefins plant that was idled in October.

Georgia Gulf's decline began after its $1.54 billion debt- financed buyout of Canada's Royal Group Technologies. The buyout increased sales of siding, window frames and other vinyl housing products just as demand began to deteriorate. Georgia Gulf shares dropped 84 percent last year.

Atlanta-based Georgia Gulf isn't earning enough to satisfy loan conditions and must renegotiate with lenders or face violating debt covenants that are due to tighten on June 30, said Carl Blake, a Washington-based analyst at Gimme Credit.

'Tough Situation'

“If it's two or three years for the housing situation to turn around, this company is going to be pretty highly levered and in a pretty tough situation for a long time,” Blake said.

Georgia Gulf's 9.5 percent notes due October 2014 fell 0.5 cent to 28 cents on the dollar as of Jan. 16, according to Trace, the bond reporting system of the Financial Industry Regulatory Authority. The yield increased to 45.8 percent from 45.2 percent. That's 43.6 percentage points more than Treasuries of a similar maturity. A spread of more than 10 percentage points is considered distressed.

Shares of Chemtura, formed in 2005 by Crompton Corp.'s buyout of Great Lakes Chemical, dropped 82 percent last year. To protect $10 million of Chemtura bonds from default, credit- default swaps traders want $5 million upfront and $500,000 a year, according to CMA. That compares with annual payments of $575,000 on Sept. 12, just before Lehman filed for bankruptcy.

The Middlebury, Connecticut-based company may need to sell assets to avoid defaulting on $375 million of debt due in July, said Dmitry Silversteyn, a Longbow Research analyst in Independence, Ohio.

The company agreed last month to tighter credit terms, including a smaller revolving loan, in exchange for covenant waivers on senior debt, leaving little flexibility for the July bond, Blake said.

Chemtura's 6.875 percent notes due June 2016 fell 3.63 cents on the dollar to 49.5 cents on Jan. 16, according to Trace. The yield rose 1.5 percentage points to 20.4 percent, which is 18.2 percentage points more than Treasuries of a similar maturity.

“If by the end of the first quarter, there are no deals to sell assets, the chance of bankruptcy goes up considerably,” Silversteyn said.

To contact the reporters on this story: Jack Kaskey in New York at jkaskey@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net.

Last Updated: January 20, 2009 04:25 EST