Kevin Wilson is v.p. and treasurer of Solutia Inc., an applied chemistry company and high-yield issuer based in St. Louis.
You did not have an easy time getting bank and bond deals done in July. Has the company's financial situation changed since then?
This asset sale [Solutia recently reached an agreement to sell its resins and additives business to UCB, a Belgian chemical company] will noticeably improve the balance sheet. While 2001 and 2002 were difficult years, we did have improved performance in '02 relative to '01 and that trend seems to be continuing.
Why did you decide to sell your specialty chemicals business, which was one of your most profitable businesses?
We are selling the resins and additives business which is a component of the specialty chemicals business. It certainly was performing well, but there was a substantial investment needed to let that business grow as it could, and we had demands on our investment capacity that would have made it difficult to do that.
Also, we saw a need for significant delevering. This business was performing well enough that it could bring an attractive multiple in a weak economic environment.
You have stated that you will use the proceeds from the sale to pay down debt. Will that be bank or bond debt and how much will you take out?
It will primarily be bank debt. We will pay off a term loan and what's outstanding on our revolver. That's where 80% of the proceeds will go. We will pay off some of our off-balance sheet debt, though we don't have much off-balance sheet debt, and the balance will be used for some provisions of letters of credit. The money raised will not be used for any early retirements of public debt.
How is the company handling the costs associated with the cleanup of PCBs in Anniston, Alabama and related litigation?
Expected remediation costs are reflected in our financial statements by establishing reserves on the balance sheet for that expense. As we incur cash expenditures those are recorded against the reserves that have been established. That's for actual cleanup costs. Litigation costs are expensed as they're incurred and paid as they're incurred.
Are you insured?
We do have substantial insurance to cover litigation costs including judgments from litigation that is currently active. The insurance coverage is with names you'd recognize, but confidentiality agreements established prior to the Alabama litigation prohibit disclosure of the names of the insurers as well as the exact amount of coverage that we have. But, I will say that we would recover portions of our costs up to several hundred million dollars. It's not dollar-for-dollar, but we would have significant recoveries.
Appetite for new issues in the high-yield market has continued to improve since that time. Do you wish, in retrospect, that you waited a bit longer? [The company sold $223 million of 11.25% senior secured notes due in '09 on July 9]
No, and for a couple of reasons. One, we needed to address our October and August maturities and didn't have the benefit of that additional time. Also, one of the difficulties we were having in our case was uncertainty around the litigation in Alabama. [Solutia is the subject of highly publicized lawsuits related to PCB contamination in the state.] I don't think it would have made a noticeable difference if we'd waited. So, no, no regrets.
Do you have any near-term financing needs?
We have no immediate needs. Our next maturities aren't until 2004.
Any chance of an opportunistic financing if the economy improves faster than you expect?
We are looking at opportunities now. If something opportunistic would present itself we are prepared to act. The company's immediate issue following the close of this asset sale is to reduce the costs of our revolver and increase our flexibility there to reduce some of the limitations that we have. But, in the longer term we do see ourselves accessing the capital markets again to address the maturities in late '04 and early 2005.
When you say "if something opportunistic would present itself," what do you mean?
I could envision two scenarios. One, if we had any clarity around the litigation issue we would act now instead of waiting until 2004. Secondly, if there would be further asset sales even with the litigation unresolved.
Are you suggesting that either of these two is likely?
I am not suggesting that, no. I'm saying that between now and my next maturity is a relatively long period of time. Many things could happen.
Does Solutia continue to see the high yield market as an effective way to raise capital?
Yes. We see the high-yield market as a very attractive market to raise capital. It's certainly very liquid. It's demonstrated an ability to assess the risks associated with the cyclicality of a business and litigation risks, which are the kind of risks that we currently represent.
What criteria does Solutia use in selecting a lead underwriter for a bond deal?
There are a few main items that we look to, and they are equally weighted. First, the ability to syndicate and underwrite a transaction and deliver the appropriate structure and price. Second, a commitment to our industry as far as having a knowledge of our business certainly brings value to the table. Finally, do we have a relationship with the company as far as them providing capital and other services? Do they understand the unique issues we're facing and have an understanding of a cyclical business such as ours: where we are in an economic cycle and the volatility surrounding commodity prices as well as the issues around our litigation in Alabama? Those individual issues are not unique to Solutia but currently the combination is unique to Solutia.
Any firms you want to single out?
We've been working a lot in the past with Salomon Smith Barney and Banc of America Securities and will continue to look favorably upon those firms. We certainly don't want to limit our choices and we'll see if there are other firms that we can work with effectively. That may be Salomon or B of A, but it may be someone else as well.