ICI's cash call could be the first of many

Investors and credit rating agencies raise their guards in the wake of the Enron scandal
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ICI, Britain's biggest chemicals company, formally announced its £808m rights issue yesterday as it seeks to cut its £2.9bn debt pile and stave off a downgrade in its credit rating.

ICI, Britain's biggest chemicals company, formally announced its £808m rights issue yesterday as it seeks to cut its £2.9bn debt pile and stave off a downgrade in its credit rating.

The 7 for 11 rights issue is being priced at just 180p per share, a 44 per cent discount to Friday's closing price of 324p. ICI's shares had already fallen sharply last week as speculation grew about a fund-raising.

ICI surprised the City by paying three investment banks to fully underwrite the issue despite the deep discount. The company will pay Goldman Sachs, UBS Warburg and Merrill Lynch a total of £11.5m. Tim Scott, ICI's finance director, said the decision to have the issue underwritten was to "maximise certainty" that the funds would be raised. However, some fund managers expressed surprise ICI was effectively accepting a "double whammy" with a rights issue that was both deeply discounted and fully underwritten. "It's jolly generous of them and a nice present for the investment banks," one fund manager said yesterday.

There has even been speculation ICI may now seek a merger to strengthen its position. Asked if this was possible, Lord Trotman, ICI's chairman, said: "Absolutely. If an interesting proposal is put in front of the board, we will certainly look at it. But (a merger) it is certainly no guarantee of success." He said the company had received no overtures from potential merger partners.

ICI's distress fund-raising may have been heavily trailed but it still raises important questions for the stock market. First, will 2002 be the year of the forced rights issue? Many major companies are labouring under large debts built up during the long bull run of the 1990s, particularly the huge asset-buying binge of the last few years. Now they face a stark choice; sell assets at vastly reduced prices, soldier on as they are but face reduced earnings as their interest payments rise, or go cap in hand to their shareholders. It is not much of a choice.

Second, are we starting to see the credit rating agencies become a new force to be reckoned with? ICI was effectively pushed into its rights issue by the likes of Moody's and Standard & Poor's, which give grades to a company's debts. "They were effectively ambushed by the ratings agencies," said Peter Cartwright, analyst at Williams de Broë yesterday. If they can ambush ICI then they can do the same to many other companies too.

Senior fund managers say the UK stock market is likely to see a string of major rights issues this year as companies seek to work off the excesses of the late 1990s boom.

British Telecom bit the bullet last year with its record £5.9bn rescue rights issue. Other companies being linked with similar moves are Marconi, Invensys, Iceland, Telewest and Cookson. British Airways had been seen as another candidate but it formally ruled out such a course of action yesterday.

John Hatherly, at M&G, said yesterday: "I think we will see more of these. The credit agencies are much more influential now and people pay much more attention to corporate bonds and credit analysis. It is the nature of this stage in the cycle, when you have had a period of stress, though rights issues usually come when markets are quite receptive."

The story of how ICI came to find itself staring down the barrel of the credit agencies' gun dates back to 1997. It was then ICI decided to transform itself from a maker of lowly valued bulk chemicals into a top player in specialist chemicals such as starch. ICI paid £5.9bn for Unilever's speciality chemicals business which included the highly regarded National Starch operation which makes food ingredients. Its advisers on the deal were the same three banks which will now share £11.5m of fees for the rights issue.

To pay for the acquisition ICI sold more than 50 businesses in four years and yesterday put its Synetix catalysts operation up for sale. Critics now say ICI overpaid in the Unilever deal and failed to secure good prices for what it sold.

Lord Trotman refused to comment on past transactions yesterday saying it "would not be constructive." He also dismissed parallels drawn between ICI and Marconi, a once proud name laid low by a disastrous attempt to reinvent itself. "It's a free county but I don't see the relevance (of the comparison). The transformation from bulk to speciality chemicals was very well advised. Profits are down, for sure, but the relative performance has been excellent."

Even so, ICI's finances have been under pressure since that deal. Its disposal programme caused significant cash outflows as ICI was hit with restructuring charges and pension fund top-up payments. Last year the disposal proceeds fell behind schedule. The sale of its £285m stake in Huntsman International Holdings was due to go through last year but was delayed when the buyer couldn't find funds. ICI will now not get the money until late 2003.

After 11 September credit rating agencies became more hawkish and the major agencies contacted ICI late last year to say it would have to downgrade its debt to sub-investment grade without radical action. This would have led to higher interest payments and greater restrictions on the raising of further funds.

The company declined to criticise the rating agencies yesterday, though observers feel their increasing power may raise issues over regulation of the sector. Pension fund managers say the agencies are likely to become even more stringent in the wake of the Enron affair. Lord Trotman said of the agencies: "I usually don't enjoy my lunch when I've had a meeting with them. It's like taking your A levels on how your company is doing. Are they perfect? Who is? But they serve society well."

The rights issue overshadowed ICI's full-year profits of £401m, down from £450m the previous year. The shares, which stood at 1244p in early 1998, closed 14p higher at 341p.