Dow Chemical: Lenders Stand by CEO Liveris

Dow Chemical has one thing on its side: Lenders who are actually willing to lend.
Surprisingly, even while Dow’s $15.3 billion agreement to take over Rohm & Haas is teetering, the chemicals giant so far appears to have the full support of the 18 lenders who agreed to provide Dow with a $13 billion bridge loan. “We stand ready and willing to fund,” said one person close to the financing, in an idea echoed by several of his compatriots.

Deal Journal spoke to people at several of Dow’s lenders, all of whom said that they stand by the $13 billion bridge loan and are ready to fund. That is all the more remarkable because the banks have been largely in the dark about the deal’s fate: as of last night, Dow Chemical had not contacted the banks to discuss the Rohm & Haas deal or the lending terms as of last night, according to several people familiar with the situation.

Lenders before have promised to fund, only to pull away their commitments or start hardball negotiations over terms. That was the case with the buyout of Clear Channel Communications, which eventually closed after a brief scrimmage in court, as well as the busted buyout of Bell Canada. Of course, that could always happen with the Dow Chemical deal as well as the lenders speak with the company.

In this case, however, the banks have far less to lose. In both the Clear Channel and BCE deals, some banks held more than $10 billion of lending commitments. In the Dow deal, in contrast, the $13 billion, one-year bridge loan was very cleverly structured, leaving no bank with more than $1.3 billion to fund. Most of the banks in the 18-bank syndicate for Dow, hold chunks of under $900 million each. No bank, then, has much incentive to rock the boat.

There could be several reasons other why the banks are standing by their commitments. The primary one is that Dow Chemical is a highly valued investment-grade corporate client that taps the financing markets often and works closely with Wall Street firms. And lastly, Dow Chemical’s acquisition of Rohm & Haas is one of the last large sources of investment banking and financing fees for beleaguered Wall Street banks who have seen deal flow dry up in the past few months.

Dow’s credit rating was cut last week cut to within two notches of rating that would allow trip a covenant and allow the lenders to renegotiate the terms of the loan. Still, none of the banks we talked with believed Dow would be cut to junk or that the covenant would be tripped.
The lenders’ blind faith in Dow and willingness to stand by their commitments stand in marked counterpoint to a yearful of deals in which bank lending commitments were weak links that threatened the survival of some deals. Several proposed mergers faced intense concerns about the soundness and availability of their funding, including the buyouts of Clear Channel Communications, Bell Canada, Huntsman Corp., Alliance Data Systems and BHP Billiton’s proposed acquisition of Rio Tinto.

Dow was planning to use $7.5 billion of the money it would have gotten from Kuwait to finance Dow’s own proposed acquisition of Rohm & Haas. There are precious few options for Liveris to find an equal amount of money elsewhere, since he is already cutting nearly one-third of Dow’s production capacity and has sworn not to eliminate the company’s stock dividend. As Deal Journal wrote last week, Liveris is facing a bit of a funding crunch and could use the $2.5 billion breakup fee from Kuwait to help finance the acquisition of Rohm.
Today, Liveris told our colleague Ana Campoy about the Kuwait deal, “We have not shut the door to doing the deal. If the deal was to be done tomorrow on the terms that were agreed, we would go ahead and do it….We will seek remedy for the damage done to Dow and we will seek it until we get remedy. That could be multiple billions of dollars and that could be any time frame this year or beyond.”

Update: Perhaps the lenders have not rebelled yet because assured everyone that he will find the $7.5 billion elsewhere. In an interview with Bloomberg today, Liveris said that he expected six “firm” offers from companies eager to take Kuwait’s place in the joint venture. Liveris also said that Warren Buffett and the Kuwaiti government remain committed to the $3 billion financing they have already promised. He also said he plans asset sales to get the $7.5 billion:
The $7.5 billion number, we would seek to get that number again. We would fill that hole not just with this property but with other properties we would divest. Some of those properties are in the [sales] process right now, it’s just a matter of restructuring it. It’s about putting a capital structure in place that replaces the Kuwait money. That $7.5 billion number is a realistic number given our size.
Liveris added:

“Warren [Buffett] is a big supporter of maintaining his interest in what Dow is doing despite the fact that his convertible preferred [holding in Dow] is underwater.”
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Read more: Deal Makers, Dow Chemical-Rohm, Funding, Investment Banks

Posted by Heidi N. Moore (Wall Street Journal)