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How Worrisome Is LyondellBasell’s Interest Expense Increase?

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LyondellBasell’s interest expense

In 2017, LyondellBasell (LYB) spent $467 million in the form of the interest, representing an increase of 45% on a YoY (year-over-year) basis.

The increase in LYB’s interest expense was primarily the result of pretax charges of $113 million on $1 billion worth of senior notes carrying a 5% coupon rate. The company’s interest expense is expected to fall in 2018, as its debt levels have shown a declining trend.

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Note that LYB’s interest expense fell from $655 million in 2012 to $309 million in 2013 despite a rise in its debt. This was primarily the result of the company’s refinancing its high-coupon-rate notes with lower-coupon-rate notes. In 2017, LYB pursued a similar exercise to help it bring down its interest expense. Going forward, we can expect the company’s interest expense to fall, which should help to improve its net earnings.

Interest coverage ratio

It’s important to have an idea of how comfortable a company is in servicing its debt. The interest coverage ratio tells us that. It can be obtained by dividing a company’s EBIT (earnings before interest and tax) by its interest expense. The higher the multiple, the better it is for the company.

At the end of 2017, LYB’s interest coverage ratio stood at 11.1x, almost the double the industry average of 5.9x. Its peers Westlake Chemical (WLK), Olin (OLN), and Celanese (CE) have interest coverage ratios of 7.9x, 1.7x, and 7.9x, respectively.

Investors can indirectly hold LYB by investing in the Vanguard Materials ETF (VAW), which invests 3.8% of its portfolio in LYB as of March 23, 2018.

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