‘Everything that could go wrong did’

Len Blavatnik made much of his money navigating the troubled oil and aluminium sectors in the former Soviet Union, but he has faced one of his greatest setbacks in the past few weeks in the very different world of plastics and chemicals.

A New York court yesterday heard the Russian-born billionaire’s request for bankruptcy protection of LyondellBasell. He has built the group since 2005 through acquisition and merger into the world’s third-largest petrochemicals group. It is now lumbered with debts of about $26bn. LyondellBasell, a Dutch-registered company controlled by Mr Blavatnik’s Access Industries, generates annual sales of $55bn from chemicals, fuels and polymers. It has 16,000, employees split between factories in the US, and Europe, and smaller operations in dozens of other countries.

His interest began with a chance meeting with Purnendu Chatterjee, an Indian entrepreneur who sought his help in acquiring the BASF-Shell joint venture Basell, a manufacturer of polypropylene. When his partner dropped out, he took on the deal himself, diversifying from his previous interests in oil through a holding in TNK-BP.

Then at the end of 2007, Mr Blavatnik, a US citizen, swelled its debt by more than $12bn by acquiring Lyondell of the US, including Houston Refining, widely seen as one of its most attractive assets.

“Everything was at the top of the market. It was a full price but not a crazy price for a very good asset,” Mr Blavatnik told the Financial Times, stressing that the deal was at a multiple of just over six times earnings before interest, tax, depreciation and amortisation.

After the cycle in the sector peaked, he said he had anticipated a downturn, and that the group’s business plan for 2008 included a significant reduction in debt, as well as restructuring to reduce costs. But then during the second half of the year, “everything that could go wrong did go wrong”.

The drop in oil prices added to demand for working capital, and the slump in the world economy sharply depressed orders. Demand from the automobile sector alone, for instance, which accounts for a tenth of group sales, dried up entirely.

Hurricane Ike forced the Houston refinery to shut down for several weeks, and there were further setbacks caused by a fire. The final tipping point, following the credit crunch, came when banks tightened the lending terms on its financing, pushing the company towards insolvency. Access stepped in to provide fresh working capital of $750m, and also acquired parts of other refinancing, in a move that could demonstrate its confidence in the company.

The transaction also has the benefit of giving Access a stronger voice in the bankruptcy proceedings, during which the judge must weigh the interests of all the different classes of creditor.

Under US Chapter 11 procedures, LyondellBasell now has 18 months to present a restructuring plan for approval. Asset sales are possible, and there is believed to have been interest, but the current environment is not favourable.

Andy Dvorocsik, director for chemicals, The Americas, at Arthur D Little, the consultancy firm, argues that the group must hope demand begins to recover in the medium term. But, he says, LyondellBasell and a number of its competitors face growing pressure in the future, including from the larger, more modern plants that have recently been built in the Middle East.

“I think you’re going to see things getting worse in the short term. This has been the first and the largest petrochemicals group in trouble. It is unlikely to be the last.”