Chemical sector vulnerable to uncertainty in Iraq, Venezuela, S&P warns

New York, Jan. 13 - Credit quality in the U.S. chemical sector could be vulnerable to rises in oil and natural gas costs caused by uncertainty in Iraq and Venezuela, Standard & Poor's warned.

"Credit risk remains elevated despite modestly improving business trends and the belief that industry fundamentals support a cyclical recovery," said Standard & Poor's credit analyst Kyle Loughlin, in a news release. "This reflects many issuers' heightened sensitivity to downgrades after several years of underperformance and the threat of event risks due to political, end-market, or economic uncertainties."

In particular a sustained increase in oil and natural gas costs could have a large negative effect on raw material costs, further challenging economic growth in the U.S. and adding new pressures to U.S. chemical company margins, S&P said.

As a result, credit quality in the U.S. chemicals sector is unlikely to stabilize until strong product demand has been achieved as a function of sustained economic growth.

Issuers already under pressure could face elevated credit risks from an extended trough, S&P said. For example companies may need to tap bank lines if free cash shortfalls persist, they may under-invest in assets, suffer strained banking relationships, experience less flexible financing structures, violate financial covenants and face perceived refinancing risks, S&P added.

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