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Non-Tech : Auric Goldfinger's Short List -- Ignore unavailable to you. Want to Upgrade?

To: StockDung who wrote (11834)	7/9/2003 9:54:14 PM
From: scion	Read Replies (1) \| Respond to of 19428

Clariant Bonds Could Offer Hefty Rewards to Investors By DAVID REILLY Staff Reporter of THE WALL STREET JOURNAL Clariant AG shares took another drubbing last week as fears continued to mount that the world's second-largest specialty-chemicals company may have to turn to markets for funds to repair its balance sheet. Although worries about a potential rights issue have plagued the stock since the beginning of the year, they gained new life after the Swiss company two weeks ago announced it was halting its biggest investment project, a plant in the U.S. that was supposed to supply Procter & Gamble Co., and that it would take a write-down of 120 million Swiss francs ($88.8 million or ?77.8 million) as a result. Clariant's stock fell nearly 9% last week even though the company has denied that it has any plans to tap the equity markets this year. The shares, which are down nearly 45% since the start of the year, edged up 10 Swiss centimes Friday to 12.55 francs in Zurich. Capital-increase rumors aside, the stock is likely to stay under pressure for some time given the challenging business conditions facing Clariant and the specialty-chemicals industry as a whole, along with the company's need to restructure after overpaying for acquisitions in recent years. In addition, analysts have been ratcheting down earnings expectations during the past two weeks and lowering recommendations on the stock. In a note to investors after Clariant's announcement about the U.S. plant, J.P. Morgan cautioned that there is still a lack of transparency on Clariant's forecasts, strategic direction and its ability to meet its goal of reducing net debt to 2.5 billion francs by the end of this year from a current level of about 3.5 billion francs. Despite the gloom, some bond investors think there is an opportunity to be had here. They believe that concerns about a cash crunch are overdone because the company should be able to sell assets as planned and that with a new chief executive at the helm, a turnaround may be in the offing. If that's the case, Clariant's debt, unlike its stock, could offer some hefty rewards. While corporate-bond spreads -- the difference between the yield on a bond and the yield on offer from risk-free, benchmark debt -- have narrowed significantly in recent months, Clariant's debt continues to trade at a distressed level. This reflects the worries surrounding risks to its businesses from rising raw-material prices, falling demand and negative effects from a strong euro. In addition, Clariant's debt is 3.8 times its equity, which has been falling because of repeated write-downs, and a further decline in earnings this year could put the company in breach of covenants on its banking facilities. If that were to happen, the company would be pushed into a funding crisis and both the stocks and the bonds could get pounded further. Clariant had to renegotiate terms of its bank debt at the end of last year and could be forced to do the same this year, pushing up its interest costs. But bond bulls are betting the company will be able to avoid breaching covenants and will somehow raise funds. Unlike those holding the company's stock, bondholders don't care if the money comes from asset sales, a rights issue or a sale of new debt. In any case, an injection of additional funds would alleviate fears about the balance sheet, presumably causing the yield on Clariant's bonds to fall and the price of the debt to rise in value. They also believe that the company could assuage fears of a cash crunch even if it sells only a portion of the assets it wants to put on the block. They expect the company to be able to finance a large portion of the 432 million francs in long-term debt coming due this year with cash generated from operations. A spokesman for Clariant said the company expects to finance all the redemptions this year with the cash it generates; the company also expects to roll over about 660 million francs in short-term debt that comes due. Even if Clariant falls short of generating enough cash to cover the 432 million francs coming due, asset sales might be able to cover the remainder. A similar scenario should unfold next year, when the company has about 490 million francs of long-term debt coming due. Things get tougher in 2005 when 700 million francs in debt comes due, but the company should have enough time to sell off businesses and restructure before that deadline looms, the bulls argue. In looking to realize a windfall from Clariant's debt, investors are hoping for a replay of what happened this year at French specialty-chemicals company Rhodia SA. Late last year the spreads on that company's bonds widened to distressed levels in anticipation of its debt being downgraded from investment-grade to junk status, which happened early in 2003. Although the markets appeared closed to the company, which was reliant on short-term funding and so needed to be able to tap markets quickly, some investors figured the company would be able to restructure its debts. Rhodia did this successfully in May when it launched a ?1 billion ($1.14 billion) high-yield offering and used the proceeds to retire short-term bank debt. The spreads on Rhodia's other debt then narrowed dramatically. Banking on such a turnaround at Clariant isn't without risk, of course. First, the bonds aren't very liquid and trade infrequently. Clariant has only about ?825 million in Swiss-franc-denominated debt, and the spokesman said the company has no plans at the moment to try to tap the high-yield or convertible-bond markets. Also, new CEO Ronald Loesser, who was appointed in March to replace Reinhardt Handte, needs to come up with a credible restructuring strategy when he meets with investors for the first time in early August upon the release of first-half results. Without a plan that garners confidence or a clear sign that the company has secured additional funding, the debt isn't likely to take off. Finally, operating margins at the company's businesses could continue to come under pressure, cash generation could fall, and failure to meet the debt-reduction goal could sorely try investors' patience. Write to David Reilly at david.reilly@wsj.com Updated June 30, 2003