A buy-side and sell-side analyst are divided on whether Lyondell Chemical Company's planned purchase of Occidental Petroleum's 29.5% stake in Equistar Chemicals will benefit Lyondell bondholders. And, in an unusual turn of events, it is the sell-sider who is the bear. "Because any significant decrease in Lyondell's debt depends on an increase in Equistar's currently depressed levels of profitability, which may be a long time in the future, I'd not be buying bonds on this news," says Mark Hughes, head of European high-yield research at BNP Paribas. He argues that, given the almost six times leverage on a senior secured basis, Lyondell's 9.875% notes of '07 (Ba3/BB) should be bid at 95.625. Last Tuesday, they were some four points higher, at a 99.5 bid, two points higher than they were before the deal was announced.
A New York-based buy-side analyst says there is good reason Lyondell's bonds have been bid up since the announcement. He argues that Equistar will see its cash flow improve, allowing Lyondell to reduce leverage once the chemicals industry emerges from its current cyclical trough. He says swapping out of Equistar's 10.125% senior notes of '08, which were downgraded from Ba2/BBB- to B1/BB+ creditwatch negative after the transaction was announced, is "a trade worth considering." He declines to say whether his firm actually made the trade.