RBS reveals $3.5bn loans to bankrupt US chemicals firm

Exposure includes $1.6bn of lower-ranked debt that could be worthless

By Sean Farrell,Financial Editor
Tuesday 13 January 2009 01:00

Royal Bank of Scotland was forced to reveal yesterday that it has lent $3.47bn (£2.34bn) to Lyondell Chem-ical, the bankrupt US chemicals com-pany. Analysts warned that RBS, the biggest lender to Lyondell, was at risk of losing a sizeable proportion of the money.

RBS inherited the loans from its ill-fated acquisition in 2007 of ABN Amro's investment bank. The loans are thought to include $1.6bn worth of lower-ranked credit that could lose all of its value. ABN Amro is listed as Lyondell's biggest secured creditor in documents filed in the US bankruptcy court in New York.

The potential loss is the latest banana skin for RBS linked to the £10bn ABN Amro deal. RBS's pursuit of the Dutch bank during the financial meltdown helped to seal the fate of Sir Fred Goodwin, who quit as chief executive late last year. Last month, RBS revealed it could lose £400m from Bernard Madoff's alleged $50bn fraud in the US because of deals done by ABN.

RBS has signalled that it will make its first annual loss in 2008 after taking massive losses on assets such as structured credit and leveraged loans. In the first half, the bank booked £5.9bn of losses, about a third of which came from ABN Amro.

Leigh Goodwin, a banking analyst at Fox-Pitt Kelton, said: "It appears this [the Lyondell loan] was a leveraged loan that went wrong. There is always the chance that there will be one of these."

He said that if RBS realised it was going to make a material loss from the Lyondell loans, it would have to issue a statement to the market. However, unlike the potential Madoff loss, which was caused by alleged fraud, there is less certainty about the potential losses from Lyondell.

An RBS spokesman said: "It is early days and we don't want to speculate on the outcome." The bank declined to comment on the nature of the loans or whether any of the debt had been sold on.

Lyondell Chemical has arranged up to $8bn in debtor-in-possession (DIP) financing to fund continuing operations, in which RBS is taking part. Under US bankruptcy protection, a company continues its day-to-day operations while it reorganises its finances and is protected from creditor lawsuits.

Lyondell Chemical filed for bankruptcy last week, citing falling demand for its products and the volatile cost of raw materials. The Houston-based company makes polymers and petrochemicals as well as refining crude oil and gasoline-blending products. It listed debts of $19bn and assets of $27bn, according to the court documents.

The company's parent, LyondellBasell Industries, was created a year ago when Basell NV of the Netherlands bought Lyondell Chemical in a $12.7bn deal financed by RBS, Citi, UBS, Merrill Lynch and Goldman Sachs. The banks supplied $20.4bn, comprising a $12.4bn loan and an $8bn one-year bridge facility. The debt was made up of $12.5bn of first-lien bank loans, $5.5bn of second-lien notes and loans, and $2.5bn of third-lien notes and loans. First-lien lenders are first in the pecking order for repayment if a company defaults.

Lyondell Chemical needed immediate funds to pay down more than $1bn in debt due over the next few weeks and had also run out of cash to fund operations. Citi said last week it would take a $1.4bn loss on its $2bn of Lyondell loans. Analysts have estimated UBS's losses from Lyondell as up to $500m in the first quarter.

RBS is now 58 per cent owned by the Government after accepting £20bn of state money to boost its capital reserves. Analysts expect Stephen Hester, the chief executive, to take a hard line on writing off exposures built up under Sir Fred's leadership to clear the decks as he did as chief operating officer at Abbey National. RBS shares dipped on the news of its exposure to Lyondell, but closed up 3.6 per cent at 55p.

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