Chemical Industry Outlook for 2010 + M&A and Financing Trends

Joseph ChangGlobal Editor

DCAT/ISM Strategic Sourcing Summit ’09New Brunswick, New Jersey

November 4, 2009

V- or W-shaped Recovery? The New Volkswagen (VW) Syndrome

ICIS Petrochemical Index

0

50

100

150

200

250

300

350

400

Oct-93

Oct-94

Oct-95

Oct-96

Oct-97

Oct-98

Oct-99

Oct-00

Oct-01

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

*Communicatrix**Intimate Strangers – unseen life on earth by Cynthia Needham (about microbes)

“Volkswagen Syndrome”

“Yellow Volkswagen Syndrome” = bringing something to mind all of a sudden brings it into your field of vision*

“Volkswagen Syndrome” = when scientists make assumptions about similarity based only on appearance**

1946 1971

DJIA 1924-1961

S&P Chemicals Index

0

50

100

150

200

250

300

350

400

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Economic Outlook – Most Signs Point to Up

Pros Global economic recovery, led by BRIC countries Global industrial production turning up Low interest rates, recovering financing market Climbing global equity markets Q3 earnings show sequential improvement + encouraging guidance

Cons High unemployment rate approaching 10%+ in US Housing prices still searching for bottom in some regions Potential looming commercial real estate and consumer credit defaults

The OECD CLI + 6 andGlobal Industrial Production

% Y/Y Change (3MMA)

Source: OECD, various national statistical agencies, ACC analysis

Majors/Diversified E2009 EPS E2010 EPS % Change Stock price* P/E (2010)

Dow Chemical $0.47 $1.28 +172% $25.25 19.7x

DuPont $2.01 $2.24 +11% $32.97 14.7x

Celanese $1.48 $2.28 +54% $28.25 12.4x

Huntsman ($1.10) $0.04 N/M $8.66 N/M

Eastman Chemical $3.13 $3.98 +27% $55.42 13.9x

Specialties E2009 EPS E2010 EPS % Change Stock price* P/E (2010)

Nalco $0.80 $1.18 +48% $21.77 18.4x

Cytec Industries $0.98 $1.96 +100% $35.21 18.0x

PPG Industries $2.78 $3.70 +33% $58.41 15.8x

FMC $4.11 $4.74 +15% $52.80 11.1x

Albemarle $1.80 $2.41 +34% $33.18 13.8x

Arch Chemical $1.70 $2.08 +22% $28.57 13.7x

Rockwood $0.44 $1.04 +136% $20.97 20.2x

Lubrizol $6.89 $6.82 -1% $67.89 10.0x

AVERAGE 15.1x

*As of the close of October 29, 2009Source: Yahoo! Finance, ICIS Chemical Business

Wall Street Crystal Ball 2010

A Tale of Two Cities

Sources: Young & Partners, ICIS Chemical Business

Private equity leveraged buyouts (LBOs) of chemical companies rise in 1999 and peak in 2005 at 36% of total M&A dollar volume. H1 2007 also hits 28% of deals and 36% of dollar volume.

Chemical M&A peaks in 2007 at $55bn in deals

Loose lending practices with covenant-lite loans

High leverage became more accepted

Stock buybacks liberally used as a tool to boost shareholder value

Recipe for Disaster

Wall Street and Management

Out of 70 North American companies under coverage by Moody’s, 2/3rds are in the high-yield (junk) category (under BBB-). This compares to <1/3 at the end of 2001

S&P ratings downgrades outnumber upgrades 28-6 YTD

30 companies rated “B and CCC” – highly leveraged!

North American chemical industry credit quality

A Heavier Debt Load

Company LBO vintage Debt/EBITDA (LTM)

SABIC Innovative Plastics 2007 9.9x

Cognis 2004 9.0x

Hexion Specialty Chemicals 2004 8.8x

Momentive Performance Materials 2006 8.7x

PQ Corp. 2007 8.0x

MacDermid 2007 7.2x

LyondellBasell Industries 2007 7.0x

Brenntag 2004 6.4x

Kraton Polymers 2003 5.2x

INEOS Group 2005 4.8x

Source: Standard & Poor’s, stats from 2008

Vintages Gone Bad

Company Rating

DuPont A, Stable

Air Products A, Stable

Monsanto A+, Stable

PotashCorp A-, Stable

PPG Industries A-, Negative

Praxair A, Stable

Sherwin-Williams A-, Negative

Sigma-Aldrich A, Stable

Source: Standard & Poor’s

Pole Position

“Free” Cash is King

“Free cash flow (FCF) is the best measurement of management’s freedom of action. A firm with negative FCF will have difficulty

maintaining current operations without selling assets, issuing debt or issuing equity. A firm with positive FCF can invest in future

growth, reward shareholders, reduce liquidity risk or preemptively fund pension plans.”

Source: Laurence Alexander, Jefferies & Co.

($100) $0 $100 $200 $300 $400 $500 $600

CBT

CYT

KOP

HUN

OMN

SOA

ALB

NLC

ARG

PX

ASH

LZ

Avg

ECL

APD

MON

DD

Estimated 2010 Free Cash Flow

Source: Jefferies & Co.

-3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7%

CBT

CYT

KOP

HUN

DD

PX

ASH

Avg

MON

NLC

ARG

OMN

APD

ECL

ALB

SOA

LZ

Estimated 2010 FCF/Sales

Source: Jefferies & Co.

Haves and Have-nots

Investment-grade firms: Can raise money on bond market at decent rates

Junk-rated firms: Mostly frozen out of bond market. Refinancing

requires renegotiating with lenders

Financing market thawingDebt issuance 2009 through Q3

January Lubrizol issues $500m in 10-year notes with 8.875% coupon –

replaces 4.625% notes

July Cytec issues $250m of notes due 2017 at 8.95% – some proceeds

used to repay 5.5% notes

August Olin issues $150m in notes at 8.875% Air Products issues $400m in notes at 4.375% Praxair issues $450m in notes at 4.5% Dow Chemical issues $2.7bn in various debt instruments

September Cabot issues $250m in notes at 5% Airgas issues $400m in notes at 4.5% PotashCorp issues $1bn in notes at 3.75% to 4.875%

Common denominator – all investment-grade companies!

Junk Rising?

October: NOVA (owned by IPIC) issues $700m in notes at

8.375% to 8.625% Solutia issues $400m in notes at 8.75%

On tap: RPM International $250m in notes ASP GT Acquisition Corp. $330m in notes (1st debt

offering by PE buyout since PQ Corp. in 2007)

Mergers and Acquisitions – Back to the table in 2010

Global Chemical M&A Trends

*Deals over $25m in sizeSource: Young & Partners

An M&A Comeback

Date Buyer Target Price

8/31/2009 Huntsman Tronox $415m

8/31/2009 GenNx360 Capital Clariant’s silicones (now SiVance) N/A

9/8/2009 Solvay SGI soda ash plant in Russia $229m

9/9/2009 Merck KGaA Suzhou Taizu (effects pigments) N/A

9/15/2009 Unigel BASF’s Brazil PS business N/A

9/23/2009 Kemira AkzoNobel iron coagulant unit N/A

9/28/2009 American Securities GenTek (chems, auto parts, valves)

$411m

10/14/2009 Evonik Industries Eli Lilly’s Indiana API plant N/A

10/19/2009 Coim Air Products’ PU pre-polymers N/A

Source: Compiled by ICIS

In the works?

Mitsubishi Chemical/Mitsubishi Rayon Braskem/Quattor Reliance/LyondellBasell Dow’s commodity chemical and plastics assets Chemtura’s PVC additives business

Joseph ChangGlobal Editor

360 Park Avenue SouthNew York, NY 10010

(212) 791-4224joseph.chang@icis.com

Thank you!