High-yield chemical sector analysts on the buy- and sell-sides say that even with a recent price drop in the bonds of Solutia, there are too many uncertainties surrounding the company's future liquidity for the bonds to look attractive.
The St. Louis-based chemical manufacturer recently announced that ongoing litigation over pollution the company is alleged to have caused in Anniston, Ala., is hurting its ability to refinance its debt. A buy-side analyst says the company's statement that it is considering "all available options" to address its future liquidity issues may be seen as a veiled threat of a possible Chapter 11 filing to bring bondholders to the bargaining table, as well as Monsanto and Pharmacia, which are also targets of the litigation, and may face larger payouts if Solutia goes under. The analyst, whose firm does not own the bonds, says his firm was briefly interested in the 7.375% notes of '27 (B1/CCC+) when they dropped 10 points to the low 30s shortly after the announcement. They came back slightly, however, to a bid of 40 last Tuesday.
Bill Hoffman, co-head of fixed-income research at UBS Securities, has a hold on the credit, arguing that whether the company is able to avoid a Chapter 11 filing will likely depend on the status of legal settlements on Sept. 30, when a waiver the company obtained on its bank covenants is set to expire. He notes further, that because the company's bonds are highly illiquid, investors would likely have to pay a premium to unload them.