In this second part of a two-part series on the specialty chemicals industry, Ben Godbout, Managing Director and Head of Strategic and Transaction Advisory at CMA, looks at the implications of sector distress for lenders and investors, and addresses how they can maximize value amidst volatility.
In the first part of this series, we outlined some of the dynamics that have resulted in distress and volatility across the specialty chemicals sector. What began as a traditional cyclical downturn has evolved into a broader credit challenge that is affecting a broad swath of the industry, encompassing petrochemicals, oleochemicals, and downstream specialties. It is also profoundly impacting investors in the sector, both private credit providers and private equity sponsors.
Capital structures that these investors created during a low‑rate, expansionary period are now facing sustained margin pressure, rising interest burdens, and shrinking liquidity cushions, with significant implications for recoveries and decision‑making.
Liquidity Pressures Pose Challenges for Private Credit Providers
Though many companies across the chemicals sector remain operationally viable, liquidity has rapidly eroded, driven by reduced operating rates, pricing pressures, and elevated working‑capital requirements. For many organizations, capital structures no longer match the earnings reality, as a result of peak-cycle assumptions that are no longer viable.
Higher interest rates and tighter credit availability have further accelerated sector distress, while floating‑rate debt and refinancing challenges have pushed even stable businesses into negative free cash flow.
Understandably, underwriting has also tightened significantly, with lenders on the defensive, amendment terms becoming increasingly stricter, and tolerance for prolonged underperformance significantly reduced.
Cyclical vs. Structural Stress
It’s important to note that some of the challenges the specialty chemicals industry is facing are cyclical in nature and will improve with time. Inventory levels will gradually normalize, and we are likely to see modest demand recovery. But persistent oversupply in certain value chains is slowing plastics demand, and new regulatory pressures signal that the deeper, structural dynamics at play are unlikely to improve with time and patience.
The risk for lenders and sponsors is misdiagnosing this larger, structural impairment as cyclical weakness, leading to value erosion, continued liquidity depletion, forced processes and amendments that delay rather than solve issues, and substantially reduced recoveries.
In this environment, lenders and sponsors should focus on proactively recalibrating capital structures, so they have controlled processes and preserved value.
How CMA Can Help Maximize Lender Recoveries
CMA brings a combination of restructuring judgment, transaction execution capabilities, and deep experience across specialty chemical markets. In today’s complex environment, our Strategic & Transaction Advisory team supports private credit providers with:
- A Rigorous Diagnosis of Downside Risk: We differentiate between liquidity stress and structural impairment through scenario‑based valuations across going‑concern, orderly sale, and liquidation outcomes.
- Balance‑Sheet Solutions Aligned with Sustainable Cash Flow: We design out‑of‑court and in‑court solutions that reset leverage, maturities, and cash‑interest burdens to levels aligned with realistic earnings.
- Evaluation and Execution of Change‑of‑Control Options: Where capital structures are no longer viable, we can guide lenders through expedited M&A, credit bids, and other pathways that preserve asset value.
- Controlled Processes That Prevent Value Leakage: We help creditors avoid amend‑and‑extend strategies that erode recoveries and instead run disciplined, timely processes that maximize outcomes.
For private equity owners, our team can assess recapitalization viability, source rescue capital, execute carveouts, and manage distressed transactions with speed and credibility. These actions can preserve optionality while promoting alignment with creditor interests.
The distress we are witnessing across the specialty chemicals sector reflects the convergence of cyclical pressures and structural shifts of a more restrictive capital environment. For lenders and sponsors, taking early action is the key to driving superior recoveries.
