Scratching your hand over the latest complicated restructuring, wondering whether Europe will continue to follow aggressive US tactics? We'll tune into Distressed Diaries, a podcast where we dig into companies that are taken to turn for the worst. I'm Bianca Borough, Senior Distress Reporters at 9th In. In this series we will explore how companies have ended up becoming overloved and more importantly how they plan to write size their balance sheets. Today I'm sitting down with Kunal Shal, the founder and chief investment officer of London based hedge fund Pivotal Point and his partner and member of the investment team Ryan Flew to look at Distress within the chemical sector. Thanks for joining me today guys. Thanks so much for having us. Thanks for having us. Great to be here. Yeah, so Kunal tell us a bit about Pivotal Point. I have a very happy to do so. So we are a London based European opportunistic credit startup and launched in 2024 and really the genesis of the firm was in recognition that we are very much in a new normal. So taking a step back, what we're seeing is potentially the most interesting investing environment for decades in European leverage credit. And I think the opportunity set really comes about due to what's been a structural shift in the cost of funding. We combine that with a restructuring toolkit today that makes it as incomparable to anything else in any other cycle. And that results in an almost unprecedented level of single name volatility. So that comes after a very long period of abnormally low rates, which was the growth of our market really occurred. And so you have a huge opportunity set where for the most part balance sheets are being stress tested, such as chemicals today. And by the time you add up all the verticals of European leverage credit, the opportunity sets well north of a trillion euro. At the time we set up the firm, it felt as if you had this very obvious opportunity set, but comparatively few people talking about it. And I think the market at the time seemed more focused on duration, ill-equid and private asset strategies. You know, as a newer entrance in the space, we have the benefit of taking an unencumbered approach to the really the full breadth of the opportunity set. And that is across sectors, you know, tackling large cap structures, looking at small cap structures, which makes the approach very scalable. We're not sector specialists, but we're very happy to be talking about European chemicals today and clearly it's somewhat topical. In fact, our next thought piece, or pivotal pointers, as we call them, talks about this in some detail. You know, there's a lot been said around the impact of AI to the software industry and broader disruption. You know, the reality is, is that this emerging technology can massively lower the barriers to entry for new entrants in the whole sort of fund management space. So it's a very exciting time. Okay. So I wanted to give a brief overview as to why we are looking at the chemical sector. It's had a pretty rough right with all the geopolitical tensions. Its initial struggles began when Russian-Vated Ukraine in 2022, which starts at the end of cheap Russian gas supply in Europe. The rise in energy costs has been coupled with weakening demand and rising competition from China. The next hit to the sector was when US President Donald Trump started his trade war at the start of last year, imposing tariffs, and China has responded by redirecting low-cost imports towards Europe. Now the energy prices have spiked again on the back of Trump's invasion of Iran at the end of February. The European benchmark gas prices have increased by more than 50 percent since the war began, around 90 percent since the start of the year. Even before the Iran crisis, gas prices in Europe were around three to four times higher than the US and two times higher than in China. If you look at the electricity costs, they're around two times higher versus US and China. So yeah, I mean, can you frame how you think the geopolitical landscape has affected the sector, can I? Sure. I mean, looking at many respects, the pace at which significant events are occurring is somewhat reminiscent of 2008, obviously for very different reasons. I mean, who's even talking about Greenland anymore? The market came into 2026, thinking tariffs were largely in the rearview mirror only to find out that there's still a lot of moving pieces here. So for the most part, the market's temptation is to look through geopolitical risk, and that remains the default position, largely because by the dip has almost always worked in recent years. If I told you a year ago, we'd have liberation day trade policy, and that was going to be announced you may have been tempted to go entirely short the market only to be disappointed by the rally that sort of quickly settled in thereafter. Geopolitics is multifastored, and there isn't just one impact on European chemicals. Some of these issues have been around since almost the beginning of European leverage credit markets. So if we look at any of your group in any of your squadro, between them, they have about 20 billion euro of debt outstanding, and notwithstanding the fact that they've got a long history in the market, taking a look at these cap structures of fresh can result in some pretty surprising conclusions. There is this combination of cyclical and structural issues, and even before we consider this new bout of stress that elevated energy costs can bring and create, we question the validity of conventional wisdom that for so long has supported valuations and ultimately leverage on these balance sheets. I think any EOS group is a good example of how quickly sentiment can change and pre the war in Iran, what has fundamentally changed with this business in the last six months? Six months ago, they access primary market funding, and that's somewhat close to them at the moment. Notwithstanding the current stress trading levels, we don't think the market has really connected the dots between the magnitude of the problem and the solutions that are possible. Yes, you mentioned EOS. So Jim Radcliffe, the chairman of EOS, been pretty vocal about the crisis in the sector. He warned EU decision makers in February at the Antrop Summit that the current trading conditions for chemicals is unsavivable. So no chemical business will survive with current energy costs, carbon tax, without tariff or GC protection. I mean, they did receive the 120 million pound grant from the UK in December to save the lost ethylene plant in the UK. But let's talk a bit more about the impact on the sector, according to a survey published in February by the Chemicals Industries Association. The UK's had 25 site closures in the past five years. Steve Elliott, the chief executive of the association said there's been a near 40% fall in UK chemical production between 2021 and 2024. And he went on to say that the government's decision in 2019 to pursue net zero carbon emissions by 2050 is increasingly out of step with the UK's key competitors. So what are you views and the need for state support in the sector? Sure. I mean, there's a fair bit to unpack there. So I guess bear with me. I think a useful place to start is to frame the numbers on the structural backdrop. And even if we just reference the numbers that any EOS themselves have put out. So over the past couple of years, the European chemical sector has seen around 101 sites closed, which is translated to 25 million tons of chemical capacity disappear. And if you look at the direct jobs of those plants and also the indirect jobs that support that infrastructure, it totals around 75,000 jobs impacted. What's probably the more interesting or comparable statistic there is in EOS and Sir Jim Ratcliffe priced the replacement cost of those sites at 70 billion euros. So obviously when you see state support in the millions and hundreds of millions, you could argue it's a bit of a drop in the ocean. It's obviously not quite Naples to Apple's comparison because some of the sites that have closed will be economically unviable, aged assets, etc. But it's a sort of helpful data point to frame it. And I think when we look at closures, the trajectory from what we can see if anything is accelerating. So in December 25, we Roland Berger published a report that showed that the closures announced increased sixfold between 2022 and December 25 from 2.9 to 17.2 million tons per year. And again, they doubled between 24 and 25 or December 25. So it's clearly accelerating. I think the more interesting point as it relates to Europe versus, for instance, North America, is Europe operates in what we'd sort of coin a hub and cluster dynamic. So European chemical plants don't typically operate in isolation. They're interlinked through shared feedstocks, utilities and off-tank agreements. So what that means in practice is when one steam cracker is closed, it can trigger a bit of a localized castigade. And effectively, you've got each participant in that cascade watching their neighbor and what could start as one cracker closing quickly ends up with an entire hub being unviable. And so I think that's the dynamic we're sort of seeing. I guess if I just go back directly to the question on state support, probably the best way of framing this is going back to the Antwerp Declaration because that's obviously what's been most recently in the news, but this started in February 24 when 73 business leaders across 17 sectors presented a European industrial deal to the Commission President von Delayen and the Belgian Prime Minister. There's definitely a lot of ambition there. But the first annual monitoring report was actually released last month and showed that for 83% of the KPIs that were monitored, the sort of status is either the same or even deteriorated. So it's clearly still a problem and that hasn't sort of had the desired effect. The obvious sort of points and block
mentioned were what you would imagine. So high energy costs, slow infrastructure deployment, and obviously a heavy regulatory burden in Europe. So they're the key barriers. I think, as you've mentioned earlier, that it would be unfair to say that the temperature hasn't sort of risen recently and it feels a bit more substantive than a lot of the rhetoric that we've seen in the past. So at the most recent February 26 summit, Macron was widely reported to have spoken for an hour without notes on this issue. So it's clearly a focus point for him. The UK has obviously provided the grant and guaranteed a loan for the Grangemouth plant and France extended 300 million to the Lavera site. So those are in your specific assets. Jim Rackliff again wrote a piece in the FT a few days ago talking about energy security and how that needs to tank a sort of precedent. I'm sure a lot of listeners read that article, but the high level statistics he quoted was UK oil and gas production is forecast to collapse from 74 million tons in 2022 to just around 33 and 2030. So it's clearly quite a stark decline. Appreciate that's a long answer. The only thing I'd sort of end with is not all state support necessarily is the same. And just because an asset gets state support doesn't, doesn't mean that the balance sheet of the issue of becomes more sustainable or indeed that creditors benefit. So in some instances state support just funds wages and it might not actually benefit creditors in a material way. So we're following a few chemical companies here at 9th in, but yes, any else has garnered a lot of attention from restructuring advisors. The group recently secured 500 million euros in funding. Do you think it's out of the woods yet? I mean, look, the short answer is no. I think that funding package would be more powerful if we thought the issues facing any us were just cyclical, but we don't really think that's the case. I mean, if we just take any or screw up and look at the OMP business when North America's margins are running at that of four times what they're seeing in Europe, it's hard to argue that Europe isn't at a structural disadvantage. And I think that's pretty well signposted and most people appreciate that that's a function of feed stock economics and energy costs. And it's just that Europe structurally different and it remains so we'll probably touch on project one in a bit, but obviously that's looking to try and change that a bit, but it's somewhat of a stock gap. When we look at ineos today, the group from what we can see on an LTM basis is operating below what has previously been shown as a bottom of the cycle sort of economics. So that kind of begs the obvious question to us that if you're already operating below the bottom of the cycle, should the whole validity of through the cycle valuation analysis even holds still? And I think if we set aside fluidity of macro variables, so severe oil shocks, for instance, the near term triggers across both ineosant group and Quattro are quite clear to us. Let's start sort of almost in chronological order there. So the Quattro 27 materials were well signposted as the most pressing. With that funding package that you've discussed, it's substantially addressed. It's worth just reasserating the point that of that funding 200 million is a shareholder commitment and a lot of people have seen the positives in that. So we sort of tank that in conjunction with public comments that ineos is focused on replacing debt as it comes due rather than seeking new funding for other purposes and put that all in the hopper and kind of conclude that Quattro has a bit of runway. So then I guess before I move on to group, I'd say that it has been noted that Quattro is using excess liquidity currently to buy back the 27s. It's doing that rather than capturing more of a discount in the longer dated paper. So there's a bit of a distinction we see there between how both sets of creditors are being treated and you can sort of read into that what you will. But the next most significant issue sits at the group level. So ineos group has about 1.8 billion of debt coming due in 28. As is typically the case, we'd expect the issue to start looking to address that when it comes current, which is sort of first half of 2027. What makes that particularly interesting is that's when Project 1 is also expected to start up. Now that's assuming it doesn't see any sort of further delays or cost overruns to which it's had a little bit. But Project 1 has been pitched as a meaningful earnings catalyst for the group and its completion or failure to complete on time will presumably be an important input into any refinancing conversation. So ineos as well as other chemical producers that we follow like Oxada have responded to the crisis by selling various assets within their companies. Do you think this is the main response that the chemical producers are taking? It's a hard one. I think on the ineos asset sale, I'd say it's a bit more speculative at this point than outright confirmed by the company. I think looking for third party was to come in and make a favorable price for some of these assets and that was to be used to pay down debt. I can see how creditors might see that in a positive light. A sort of caution that feels a little bit glass half full to me and or at least a glass half full viewpoint. And even if they were looking at asset sales, a lot of that speculation came before even the latest developments in Iran so that the very least that's got to impact valuations and the likelihood of a transaction closing. I think what it's somewhat related, I suppose, to looking at sales, but when when we look at the risks that are actually facing more specifically group here. When we review the public documentation across across the bond, there's actually very little in the way of protections for creditors toward off an LME or what we're more often seeing as a multi phase LME. So if the shareholders or an opportunistic credit a group decides to go down that path, there's there's not much that can be done right now. To kind of put more meat on the bone, both structures lack protections against non-pro-rata redemptions both have meaningful basket capacity for drop downs and there's no J. Crew style block of restricting which assets can be moved. So in the simplistic terms, it'd be quite possible for subset of creditors to receive materially more favorable treatment than others. And just to bring that all into kind of the biggest risk factor we see it relates to project one so this has been pitched as a European savior. It very much seems like this asset will sit at the bottom of the European cost curve owing to that economic advantage of importing ethane over using Napfer like the rest of the European assets. And there is a genuine earnings uplift story if it comes through. There is the point to be made that any else doesn't really have a great track record or comparable track record in similarly size greenfield projects. So some of those delays that we've seen and maybe future ones could be expected. But I think the scenario that would create the greatest shock is if the shareholders decided to use available basket capacity to drop down the project. That could be disguised as a friendly move, you know, they could say that there's a lot of cup of cup of Caps costs here that we need to tank out the business has been seen previously. Or it could just be explicitly used as a negotiating tactic and we've seen that in other issuers in the market. I think the long and short is we see ample capacity in the documentation to do exactly that. And I think you know past behavior can often be a good indicator of a future performance and so by our numbers between 2014 and 2025 in your group paid out 5.8 billion euro to share hold as comparatively net debt grew by 5.5 billion over the same timeframe. You know, pretty meaningful numbers as we talked about previously, you know, the market more recently gained comfort around any else quite true. And more specifically the 200 million equity commitment that was discussed or disclosed, you know, that 200 million could simply be dwarfed by elevated energy costs given more recent events. Asset sales sometimes fall short on valuation expectations and if they do you shift to a plan B. I think it's been framed, you know, is raccliffe going to be a cool son or a draw here and the reality is easy could be neither right. It is important to perhaps mention that the reference shoulder is 73 years old and perhaps as a different investment time horizon to when any else first came to the leverage credit market about 20 years ago. And that's masses when considering how long it might take for any else to grow back into its current capital structure, noting the earlier comment that you last 12 months performances through what was previously assumed to be bottom of cycle. So LME could be the answer aside from asset sales. Are there any other chemical companies on your radar? Sure, I mean, if I sort of think through the names we've looked at over the recent months one that jumps to mind in the spaces, Kronos. So this is a top five global titanium dioxide producer. It's a single monoproduct business and that product primarily is what makes white paper white. It's got about just over 600 kilotons of capacity, pretty global customer base 3000 customers across a hundred countries. I think what's interesting here is if you look at the history of shareholder distributions, there's a lot of similarities with what can house just voiced over any us. So even the most recent quarter at Kronos capacity utilization across the plant plummeted to 55% which is considerably lower than it's been for a very long time. Despite that, they announced another quarterly dividend. I think that gets paid probably in a couple of days from today. And so it tells you a little bit of kind of how the shareholders view the asset and where their priorities lie. And again, it's another situation where sentiment can quickly change and we're seeing that within your snout, but Kronos tapped the market at 107 in September 25. Those bonds are down 30 points from then and trading around 77 cents then. So when you get a combination of kind of monoproduct businesses, cost is advantageous.
is related to larger, more diversified peers and often no real vertical integration granted that's not the case for any of us. You can often see this gap risk present itself. Okay. So where do you see investment opportunities within the chemical sector? I think we've discussed a mixture of cyclical and structural issues here. And in the likes of any awesome, any else, quite true, we can see value falling pretty unevenly across the group because of those structural issues. And so when we combine that with flexibility in the dogs, you know, there's a serious possibility that value just doesn't fall to all creditors proportionately, i.e. a pro-rata deal. And so now we're standing in the fact that these structures are trading at stress levels, we just don't think you're getting compensated for the risk that you're assuming, or put differently. It just may be too early to be diving into these structures. The beauty of being sector-agnostic means we can look for opportunities much more broadly, and that paradigm of single-name volatility being elevated, we see that through structural bifurcation in the market. That's great for a long-shoot credit strategy. So if we broaden it beyond chemicals, what are the other sectors you think are being impacted by the geopolitical conflicts? I think what we're seeing now is an unprecedented level of disruption to energy markets, and that just has to have a substantial impact across the curve. I think you'll be hard pressed to find a sector that's not impacted directly or indirectly in some capacity. It's also not occurring in isolation. I mean, for example, what impact does record hyperscaler bond issuance have in crowding out the higher quality end of the leverage credit market? As regards to price action, all of this might be similar to the pandemic where the market, rightly so, at the time, looked through events. We add the creation of newly accepted nomenclature, such as EBITDAQ, which is EBITDAQ excluding the impact of COVID. The immediate impact from the geopolitical conflicts, I think, is inflationary. You need to take a view as to what costs can be absorbed by companies versus being passed through to their end customers. That in turn can have a huge impact on monetary policy, the steepness of yield curves, and ultimately the cost of capital. I think we can't really limit the spillover to cyclical, it's much, much more broadened than that. What are your predictions for the future of the European chemical sector? I mean, Lucas, can I also say that at the start, we're far from chemical sector specialists. I'd be wrong to say that there aren't going to be people out there that have much better views from a macro kind of top-down view on it. I think what I'd say is we keep looking at situations both in the chemical sector and others through a slightly different lens with that sort of distressed approach to everything we look at. What's often the case in throwing up interesting conclusions is we seem to be looking at situations where risks that we're identifying, don't seem to be priced in, and sometimes the opposite, the opportunities exist that maybe haven't fully emerged. I think that's what keeps us excited about the opportunity set go forward, and a lot of the dynamics at place seem to be something that's going to last a prolonged period of time rather than a shock or a jolt. I've slightly dodged the question, but that's kind of what I'd say. Anything to add, cannot. No, I think that's something that's pretty comprehensive. Great, well, that's all we've got time for this week. Thank you so much for coming on the podcast today. Thank you so much, Amings. Thank you. Thank you to our listeners. If you want to share feedback on this episode, please reach out to us at
[email protected], and we'll see you next time. you
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