2Q Net Loss Puts Lyondell in Danger of Downgrade

Lyondell Chemical Co., a Houston-based company that narrowly averted a debtholder revolt in May, is not doing much to calm nervous investors.

Last week Lyondell announced a net loss of $42 million for the second quarter. Analysts now say there is a possibility the debt could be downgraded if market conditions persist.

Thomas Kelly, an analyst at Standard & Poor's, said the agency would consider a downgrade if "relatively weak market conditions continue and there is no positive offset."

In April, after Lyondell's debt-financed $5.6 billion acquisition of Arco Chemical Co., S&P lowered Lyondell to BB from BBB-minus, reflecting below-investment-grade risk, and put the firm on negative outlook.

Mr. Kelly said the recently announced earnings "weren't a total surprise." A global oversupply in petrochemicals has hurt some of Lyondell's businesses, he said.

In April, Moody's Investors Service also lowered ratings for the company's senior secured bank debt, to Ba3 from Ba2.

A year earlier J.P. Morgan & Co. had led one of the biggest leverage financings of 1998, with a $7 billion package for Lyondell's acquisition of Arco. Donaldson, Lufkin & Jenrette Inc. was syndication agent and co- arranger. Chase Manhattan Corp., BankAmerica Corp., Citigroup, and Bank of America Corp. were also participants in the deal.

Poor cash flow projections by Lyondell prompted worries among investors that the company would not be able to meet its debt repayment schedule. In May, Morgan and DLJ wrapped up the $3.5 billion refinancing for Lyondell. The new structure included $1 billion in bank loans, $1.9 billion in senior secured notes, and $665 million in 35 million new Lyondell shares.

Lyondell investor relations director Sami Ahmad said the company has no plans to refinance. "We are well within covenant compliance, and the banks are pleased and satisfied with our cash flow performance."

In the second quarter, Lyondell's sales were stable at $854 million. Part of the $42 million loss was a $31 million charge associated with the debt restructuring.

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