Solutia troubled - but yields are tempting, says Gimme Credit

By Paul Deckelman

New York, Oct. 28 - Chemical maker Solutia Inc. is still looking for the right formula to deal with its heavy near-term debt load, weak EBITDA and negative free cash flow - but despite those negatives, the yields that selective investors can reap from some of its bonds, given their recent trading levels, are attractive, according to the Gimme Credit High Yield investment research service.

A key factor in Solutia's efforts to get on top of its problem was the settlement for $700 million earlier this year by companies including Solutia and former corporate parent Monsanto Co. of billions of dollars of claims filed by residents of Anniston, Ala. for damages which resulted from the decades-long dumping of PCBs at a former plant site there.

Gimme Credit high yield analyst Kimberly Noland noted that Monsanto's agreeing to fund a major portion of Solutia's liability in the case averted an impending liquidity crisis - but Solutia still had to turn to its bondholders earlier this month to seek a debt restructuring - which "caught [investors] off guard," especially since the St. Louis-based company had recently improved its liquidity picture with a refinancing of its bank agreement.

"We think an out-of-court solution can be achieved," Noland wrote, "but all the bonds could trade lower if the company is forced into bankruptcy."

Solutia's main problem, even apart from the specter of huge jury awards (which has now been diminished by the Anniston settlement) is that along with the rest of the chemicals industry, it has been suffering from a pronounced cyclical downturn; earnings before interest and taxes at the company's integrated nylon business, for instance, fell to just $29 million last year from $200 million in 1999.

Solutia, in releasing third-quarter results, warned that earnings are unlikely to improve within the next few quarters - "just what we'd expect from a management entering debt restructuring negotiations," Noland pointed out.

The analyst said that with a heavy slate of debt obligations coming due next year and in 2005, "it is possible that Monsanto can be persuaded to pick up some of Solutia's inherited obligations, as it did in the Anniston case."

She cautioned that bondholders could see not just maturity extensions in a restructuring, but a reduction in principal and interest expense for some of the bonds. With that in mind, Noland sees Solutia's senior secured notes and its euro-denominated bonds (whose holders stand to recover more in a restructuring because Solutia's European assets are not pledged to the banks as collateral) as the safest issues.

While "there is downside risk there," she wrote, "we like the secured notes at current yields of 17% and the euro bonds at yields of 10%."

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