The recent high-yield rally has provided investors with an opportunity to pick up the bonds of Lyondell Chemical Co. at a discount to its peers in the sector, says a sell-side analyst. However, at least one portfolio manager is not ready to increase his allocation to the credit, which is a benchmark issuer in the high-yield chemical sector.
Lyondell has been left behind in the recent high-yield rally due to a strike at Venezuelan state oil company Petroleos de Venezuela. The strike has disrupted the supply of oil to a Lyondell joint venture. Its 9.875% senior secured notes of '07 (Ba3/BB) were trading at 95.75 last Tuesday, some four points lower than they were on December 5. By contrast, Equistar Chemicals, which has no direct exposure to Venezuela, has seen its 10.125% notes of '08 (B1/BB) rise two points during that time. Fran Brodowicz, analyst at Bear Stearns, believes investors looking a year into the future could see as much as seven points of upside on Lyondell's senior secured paper. "At the end of the day a strike is still a short-term event, and the net impact to Lyondell's cash flow isn't as great as the market discount would necessarily imply," she says.
Northern Trust Global Investments has a small position in the Lyondell 10.875% senior subordinated notes of '07 (B2/B+), but Eric Misenheimer, portfolio manager, has no plans to increase the allocation until he sees some kind of a resolution of the strike, as well as the looming war with Iraq. "Lyondell does have a decent mix of products, but they're all tied to the energy sector. When do their margins stop getting squeezed by high oil prices?" he asks.