Orest Stelmach, high-yield portfolio manager at Steinberg Priest & Sloane Capital Management in New York, says chemical producers MacDermid, Noveon, Hercules and Methanex are ones that produce significant free cash flow even in a down cycle, and stand to do significantly better once the economy turns. He has recently purchased these bonds, using a mandate the firm won from CALPERs.
Last Tuesday, the Hercules 11.125% notes of '07 109 (Ba2/BB-) were trading at 109, The MacDermid 9.125% notes of '11(Ba3/BB-) were bid at 105. The Noveon 11% notes of '11 (B3/B) were at 107 while the Methanex 8.750% notes of '12 (Ba1/BBB-) were bid at 103.
A sell-side analyst agrees in part with Stelmach's thesis, noting that he has an "outperform" rating on Methanex and Hercules, though he rates Novion and MacDermid "neutral," saying they are "sleep at night type bonds," but are already fully valued. For portfolio managers looking to take on a bit more risk, he recommends Avecia and OM Group. He believes that these companies trade lower because they tend to be more volatile in their earnings than some of the other specialty chemical producers. Avecia's 11% notes of '09 (B3/B) were bid at 99 last Tuesday. Bids on OM's 9.25% notes of '11(B3/B+) could not be determined, but were believed to be roughly 95, according to one desk.