FocusHuntsman settlement underwhelms investment analysts

23 June 2009 21:22  [Source: ICIS news]

Huntsman settlement fails to impress Wall StreetBy Joseph Chang

NEW YORK (ICIS news)--US-based Huntsman’s $1.73bn (€1.25bn) cash and financing settlement with Credit Suisse and Deutsche Bank disappointed Wall Street, analysts said on Tuesday.

“In a rather disappointing turn of events, Huntsman settled its lawsuit against Credit Suisse and Deutsche Bank for $620m in cash and $1.1bn in seven-year term financing, meaningfully below the $3bn-plus recovery previously discussed [by the company],” said BB&T Capital Markets analyst Frank Mitsch in a research note.

Huntsman also will be reimbursed $12m in cash from the banks for its litigation costs stemming from its $10.6bn failed merger attempt with Hexion Specialty Chemicals.“The cash settlement was less than expected, but the company also received favourable financing terms,” said Jefferies & Co. analyst Laurence Alexander in a research note.

The analyst had been expecting a cash settlement of around $1bn.

Huntsman initially sought more than $4bn in damages against the lenders in a trial that began last week in a Texas state court.

The company charged that the banks conspired with Hexion and its private equity owner Apollo Management to induce Huntsman to accept Hexion’s higher $28/share bid over that of Netherlands-based chemical firm Basell.

With Basell eliminated, Hexion would then pressure Huntsman to accept a lower buyout price to avoid any losses by the banks, which stood to earn millions of dollars in fees, Huntsman alleged.

The financing portion of the settlement consists of $500m in senior secured 7-year term loans with an interest rate of LIBOR (London inter-bank offered rate) plus 2.25% and a $600m unsecured 7-year note at 5.5%.

The financing is on favourable terms, as Huntsman would have had to pay much higher rates for the same types of loans in today’s market.

“The term loan would be at least 3% higher and possibly over 4% given the negative outlook many investors have on the chemical industry,” said John Rogers, senior vice president and head of the chemical group at ratings agency Moody’s Investors Service, in an interview with ICIS.

“The 7-year note would be north of 11-12%,” he added.

Moody’s has rated Huntsman at Ba3 (equivalent of S&P BB-), and before the news of the settlement, the rating was on review for potential downgrade.

“The settlement certainly helps. Huntsman is in a very difficult operating environment and needed help in meeting its debt maturities,” said Rogers.

“Now that they got the settlement, we will wait to see the terms of the loans and then evaluate the rating,” he added.

BB&T Capital’s Mitsch noted that the settlement at least gives Huntsman’s dividend support.

“Listen, at the end of the day, Huntsman is getting around $480m in cash after taxes, with another $1.1bn of seven-year debt at better rates than [it] would get on the open market,” Mitsch said.

“Investors might have a modicum more comfort with the current dividend yield of 7.5%,” he added.

Shares of Huntsman were down 16 cents, or 2.7%, to $5.85 in late Tuesday afternoon trading. They had traded as low as $5.25 after the announcement of the deal.

Additional reporting by Al Greenwood and Ben DuBose.

($1 = €0.72)

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By: Joseph Chang
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