St. Louis, Oct 21--Solutia Inc. bondholders appear to be open to the company's plan to restructure $1.25 billion in debt, announced last week.
But while most say that the company should be able to achieve an out-of- bankruptcy solution, particularly given its recent positive news, significant uncertainties remain, in particular longer-term concerns over the company's viability.
Solutia said late last week that it has hired restructuring experts and attorneys to assist the company in its discussions with bondholders. No proposals have been outlined to date.
"This is a recognition of the fact that it is probable we'll want to have conversations with them (the bondholders), which is not something you can prepare for overnight," said Kevin Wilson, Solutia's treasurer.
The restructuring announcement surprised some bondholders, given that it came on the heels of several positive developments for the St. Louis, Mo.-based nylon manufacturer, including an unexpectedly low settlement for environmental contamination litigation and subsequent to that, a successful $350 million bank credit refinancing. It also comes just ahead of the company's third quarter conference call this Friday.
Solutia, Monsanto Co., Pfizer's Pharmacia unit and the companies' commercial insurers said in August that they had reached a cash settlement of $600 million with plaintiffs in two cases alleging environmental contamination and health problems. These stemmed from the companies' use of polychlorinated biphenyls, an electrical insulator banned in the 1970s.
Under the terms of the agreement, Solutia will pay $50 million over 10 years, with a first payment of $2.5 million in each case due in 2004.
News of the agreement sent the company's stock and bonds soaring, with the bonds jumping 20 cents on the dollar.
Those gains are one reason why bondholders are likely to go along with a restructuring offer from the company as many had bought their bonds at discounted, pre-litigation-settlement prices, said one investor. But while he expects Solutia to achieve an out-of-bankruptcy arrangement, he warned that bondholders won't just roll over for the company.
Since the restructuring announcement, the bond market has supported the notion that it isn't the death knell for Solutia, at least not in the short term.
The putable bonds, the 6.72% notes which can be sold back to the company in September 2004 and the company's short term, 11.25% bonds due in 2009 were quoted down about five cents on the dollar at 91 cents on the dollar bid, 93 offered, and 92 cents bid, 94 cents offered respectively late Monday.
The optimism reflected in these bond prices may be transitory only, said Bob Amenta, senior investment analyst at 40|86 Advisors, previously Conseco Capital Management, with $26 billion in assets under management.
Because no details of the restructuring have been announced yet, there is nothing to react to, he said.
Bondholders expect the company to include all bondholders in its restructuring offer, not just those holding the putable bonds. They also note that the successful bank credit refinancing has freed up assets that the company could use as collateral in future debt offerings.
The 7 3/8% bonds due 2027 were quoted at 60 cents bid, 63 cents offered late Monday.
One question weighing on bondholders' minds is whether the decision to restructure indicates that the company feels that pushing out maturities with a new junk bond offering, while giving it more time, may not be a long-term solution.
Solutia in September issued third-quarter earnings guidance and its chief executive officer expressed then some worry about the future.
"We have continued to be challenged by weak economic conditions, which have been exacerbated by unusually high raw material and energy costs," said John C. Hunter.
Nylon manufacturing uses natural gas, which makes Solutia subject to these commodity price fluctuations. "Unfortunately, we believe these conditions will persist for some time to come," added Hunter.
Standard & Poor's concurs. It said at the time of the PCB settlement that while Solutia was no longer on the chopping block, there was still a lot to accomplish.
Following Solutia's restructuring announcement last week, S&P lowered Solutia's corporate credit rating to triple-C with a negative outlook, from single-B-minus, citing the possibility of default in the near term.
The restructuring suggests that the company's refinancing efforts could become more contentious, and therefore more risky from a credit perspective, said Peter Kelly, director and analyst at S&P. "One concern S&P has is that the company could initiate a coercive exchange offer, which is tantamount to defaulting."
Nor does S&P expect a significant recovery in the nylon industry. "It has weak fundamentals," said Kelly, citing the exposure to natural gas. "To the extent that natural gas is volatile, nylon producers' profit margins are squeezed."
