OQ Chemicals faces a debt problem. The company, based in Monheim am Rhein, must refinance approximately 1 billion euros of outstanding debt by October of this year – a task it won't accomplish through conventional means alone. The debt burden is far too high to be repaid from its own resources. According to a recent investor presentation, the company's revenue decreased by nearly 30% to around 1.4 billion euros last year. Adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda) nearly halved from 256 million to 134 million euros.

The necessary refinancing amount is around 20% too large for conventional refinancing via the capital markets, financial markets sources say. Additionally, the old financing was arranged under conditions that prevailed before the interest rate hike. Refinancing at today's rates would be considerably more expensive. Although the company could likely afford it, refinancing under the current circumstances would probably not be feasible without a contribution from shareholders.

The company, which since December has been led by CFO Silvia Weppler, and its advisors, are feverishly working to restructure existing debt. There are two institutional capital market loans (Term Loan B, TLB) with outstanding volumes of 475 million euros and 432.5 million dollars (406 million euros). These loans were arranged by J.P. Morgan, Bank of America, and HSBC.

In addition, there is a revolving credit facility (RCF) of around 100 million euros provided by J.P. Morgan, LBBW, Unicredit, and HSBC. According to a recent report from rating agency S&P, the revolver was recently only 35% drawn, and there is currently no breach of covenants. The banks declined to comment when asked.

According to Moody's, OQ Chemicals also has an asset-backed securities programme (ABS) with a volume of around 125 million euros. In terms of insolvency ranking, the ABS programme would rank ahead of the credit line. However, in the bigger picture, this programme may not play a significant role.

The fact that rating agencies are even considering a potential insolvency scenario is due to a transaction that the Omani shareholders backed out of over Easter. OQ Chemicals had thought itself to be in the clear. From discussions with individuals briefed on the matter, Börsen-Zeitung learned that there were two restructuring solutions ready for signature.

Both variants envisioned the shareholder – the OQ Group with origins in Oman – injecting around 200 million euros of fresh equity, and additionally providing a shareholder loan of around 100 million euros. Then, either the maturing capital market loans in October would have been extended, or the financial investor Apollo would have been willing to entirely refinance the two loans. However, over Easter, the Omanis unexpectedly withdrew their consent, without providing further explanation, as reported by insiders.

In a letter presented by the law firm Linklaters, which represents the Omanis, the shareholders implied that they would suspend their ownership rights and obligations. From now on, OQ Chemicals' management would be on its own. Linklaters declined to comment when asked. The Omani shareholder did not respond to a request for comment before the article was published.

As a result, both refinancing solutions are currently off the table, and the situation is becoming increasingly critical for OQ Chemicals. Various scenarios are now conceivable. The worst-case is insolvency if no restructuring solution is found. But all parties involved are eager to avoid this scenario.

In a second scenario, a white knight could appear at the last moment and rescue the struggling company. This white knight could either take on the debt, or provide the necessary equity contribution, allowing the two original refinancing solutions to work again. The question is which potential buyer can conduct a proper due diligence in such a short time. One name that is often mentioned in financial circles is the financial investor Advent, which sold OQ Chemicals to the Omanis in 2013, and would, thus, be familiar with the company.

If a white knight does not appear, a third scenario could see the debt investors taking over the keys to the company, to stabilize the situation and then initiate an orderly sales process. In this case, the existing shareholders would have to relinquish their shares, either transferring the company to a trustee or agreeing to a debt-to-equity swap. In a debt-to-equity swap, the existing debt investors exchange their debt for equity – at least enough to refinance the remaining debt.

Since OQ Chemicals is financed through institutional capital market loans rather than a single private debt fund, there are multiple parties at the table. Buyers of capital market loans are usually CLO investors, of which OQ Chemicals reportedly has a double-digit number, according to Börsen-Zeitung. The largest are said to be Golden Tree Asset Management, Invesco, CVC, Blackrock, and PGIM. Consequently, they could take the lead in a potential consortium of investors.

So far, the major investors have not yet significantly sold off their loans. Currently, they are traded on the secondary market at 87 cents to the euro. After Easter, prices initially plummeted from 90 to 70 cents but have since recovered.

In all scenarios, OQ Chemicals and its advisors would rely on the approval of the Omanis, who still own the company – if a peaceful solution is sought. If the shareholder refuses to cooperate, the other stakeholders could also try to take a legal route. However, since this is associated with high costs, the parties are likely to be keen on reaching an amicable agreement.

It is also unclear how the banks will behave regarding the ABS programme and, above all, the approximately 100 million euro credit line. This is due in July, and therefore earlier than the two capital market loans. The company itself remains cautious: „OQ Chemicals is currently evaluating the situation. Discussions with creditors are already underway. The operational business remains unaffected by the current situation. A comprehensive solution is in the interest of all key stakeholders", the company vaguely states.

Despite the uncertainty regarding debt refinancing, there is also some good news: The operational side of business continues. Based on sources within the company, both suppliers and trade credit insurers are behaving very constructively. Additionally, the operational result continues to be positive.

Nonetheless, S&P expects the operational free cash flow to be negative this year. The rating agency attributes this to higher investment spending in Bay City, Texas. According to reports from Börsen-Zeitung, most of the investments were made in the first quarter. Furthermore, a disruption in Oberhausen reportedly affects cash flow. This occurred at the OQ Chemicals plant due to a significant operational disruption at one of its raw material suppliers.

In the cyclical chemical industry, both rating agencies see slight signs of a recovery – even before the second half of the year. This should support OQ Chemicals' Ebitda. In 2022, the company celebrated record sales of around 1.9 billion euros. However, Ebitda declined in the two subsequent years from the record year of 2021, where it was 343 million euros. The energy-intensive chemical industry is particularly affected by the price surge following the outbreak of war in Ukraine. OQ Chemicals had already responded to this by announcing a cost-cutting program in the double-digit million range in May 2023, which also included workforce reductions of up to 10%.

OQ Chemicals (formerly Oxea) is a specialty chemical company with 1,400 employees operating in over 60 countries and is part of the OQ Group – an energy company ultimately owned by the Omani Sultan. The German company was acquired by the Omanis from Advent in 2013, for a reported 1.8 billion euros. Subtracting the debt, the purchase price at that time was likely around half a billion euros.

Any loss is likely manageable for the Omani shareholders, as their core business is thriving. In early April, the OQ Group presented its business figures for 2023. Accordingly, the revenue amounted to 13.7 billion Omani Rials (approximately 33.4 billion euros). Ebitda was approximately 4.8 billion euros, with a net profit of around 2.34 billion euros.