Solutia bonds rise on PCB case settlement; funds outflow dwindles to $83.8 million

By Paul Deckelman

New York, Aug. 21 - Bonds and shares of Solutia, Inc. were sharply higher Thursday on news of a settlement of a long running legal battle which had threatened to plunge the St. Louis-based chemical company into bankruptcy. A settlement of another sort - of a labor dispute - pushed Goodyear Tire & Rubber Co.'s bonds several points higher as well. Primary market activity was meanwhile essentially non-existent.

Market players spent much of the session speculating on whether the weekly high-yield mutual funds flow numbers compiled by AMG Data Services of Arcata, Calif. would finally show an end to the recent rash of huge outflows, with some even predicting that a net inflow number might be in the cards, based upon the strength shown by the high-yield secondary market over the past week.

That latter scenario proved to be a tad optimistic - market participants familiar with the weekly numbers told Prospect News that in the week ended Wednesday some $83.8 million more left the funds than came into them. It was the fifth straight week in which an outflow was seen - but the latest week's loss was almost a non-event, compared with the billion-dollar-plus outflows which had been seen in each of the previous three weeks, including a mammoth $2.56 billion hemorrhage - a record - seen in the week ended Aug 6.

Compared with those much bigger outflows - which had resulted in a net loss of $4.91 billion from the funds over the previous four weeks, according to a Prospect News analysis of the AMG figures - the $83 million outflow was "not bad at all," a primary-side source said, but "was kind of a reflection on just how quiet the market was, even though things felt better."

"A lot of people said they thought the market was a little bit better - or at least stable, call it flat" in predicting either an inflow or a relatively small outflow, another primary-side source said, "so we were not surprised when the number came out just negative. I was hearing more on the positive side. I think a lot of people were hoping it would be a little on the positive side - but what can you do?"

Both the high-yield primary and secondary markets had, up until a month ago, been floating on an easy cloud of liquidity which made for a red-hot new-issue market and had led to strong gains in secondary dealings. When the sudden rash of outflows began a month ago - coinciding with an overall downturn in fixed-income markets - new-deal activity began to dwindle and the secondary rally stalled as well.

The fund flow numbers are watched as a barometer of overall market liquidity trends, and observers have speculated that an end to the big outflows could be a key to stabilizing the junk market's behavior and eventually letting the rallies resume.

The latest outflow - the fifth straight - brought the overall net inflow total for the year down to $12.0 billion, from the peak level of $17.3 billion seen in early July, according to the Prospect News analysis of the AMG numbers. Inflows have still been seen in 20 of the 33 weeks since the beginning of the year.

A trader said that market activity "was pretty quiet, especially after 11 a.m. People just sat around and waited for this [fund-flow] number."

One of the key features in the secondary market was Solutia, whose 11¼% notes due 2009 firmed to 86.5 bid from levels around 82 previously. The trader said the chemical company's bonds had been "up substantially over the past two weeks," creeping up to their present levels from levels as low as 70.5 bid before the upturn began.

Solutia's 7 3/8% bonds due 2027 "were up big," a market source concurred, quoting them at 62.5 bid. Not so long ago, they had been at 36.5. And Solutia's 6.72% bonds due 2037 - putable at par on Oct. 15, 2004 - firmed to 87 bid, versus 47.5 before their rise began.

On the equity side, Solutia's New York Stock Exchange-traded shares jumped $3.10 or 344.44% from Wednesday's close at 90 cents on volume of nearly 23 million shares - over 20 times the usual turnover.

Solutia's securities got a huge boost on news that the company, and chemical giant Monsanto, had settled a lawsuit brought by residents of Anniston, Ala., who claimed damages from decades of PCB pollution. Solutia's portion comes to $50 million, payable over a number of years.

Previously, the company had indicated that it could be forced into bankruptcy if some settlement were not found.

A settlement of Goodyear Tire's labor issues with the United Steelworkers Union put some bounce into the Akron-based rubber giant's bonds Thursday; Goodyear's notes "were up pretty big," a market source said, "a nice jump to them."

Goodyear's 7% bonds due 2028 firmed four points to 70 bid while its 8½% notes due 2007 were five points better at 83.

After the market closed, Gap Inc. came out with its quarterly earnings and a trader said the earnings "look really good" and added: "I would suspect that they [the bonds] will trade up in the morning if the whole market isn't down."

The primary sphere meantime remained on hiatus, having lapsed into inactivity with the postponement earlier in the week of Oxford Automotive Inc.'s $240 million two-part issue of fixed-rate bonds and floating-rate notes, plus equity warrants.

Oxford's decision to not go ahead with the bond deal was the result of several factors, according to the Troy, Mich.-based automotive assemblies manufacturer's director of corporate communications Liz Pinto.

The short explanation for the postponement is "market conditions" - a catch-all phrase encompassing rising interest rates and falling investor enthusiasm, which was also offered as the rationale for issuers like Charter Communications Inc., Panavision Inc. and Gristede's Foods Inc. to have recently pulled their deals as well.

However, Pinto said that another factor which weighed heavily in the deliberations of company executives was the proliferation of other new deals from some of Oxford's automotive sector peers, including high grade issuer Textron Inc.'s $250 million of 4½% notes due 2010, which came to market on July 22; high yield issuer Hayes Lemmerz's upsized $250 million offering of 10½% seven-year notes; and junk-bonder TRW Automotive's four-part $1.575 billion equivalent mega-deal on February 6.

Pinto said that much existing paper from the automotive sector already in the hands of investors, producing something of a glut, combined with the deterioration of market conditions seen over the past several weeks generally and specifically in the last two weeks was enough to finally convince company executives to keep this deal in the garage, especially since it was already on shaky ground; what had started out as a one-tranche deal of fixed-rate notes had to be rejiggered to add a tranche of floating-rate notes, as well as an equity sweetener - warrants for 2% of the company.

A primary source said that the word around the market even before the deal was postponed was that joint bookrunning managers Lehman Brothers and Credit Suisse First Boston, and co-manager Comerica, had been struggling to sell the deal to investors and "were unable to get their book together."

On top of that came the massive Northeastern power blackout last Thursday, with Oxford's Michigan home base part of the affected area. While the blackout will have little direct impact on the bottom lines of industrial manufacturers such as Oxford (as opposed to electric utility companies and airlines, which were forced to ground hundreds of flights over its two-day span), still, it was a hefty dose of bad karma that Pinto said "certainly didn't help," and may have been the final nail in the coffin for the deal.

The Oxford spokeswoman said that the company "will continue to evaluate the market, looking at other funding alternatives," although she declined to specify what kind of alternatives were under consideration.

There is always the possibility, of course, that the bond deal could be revived at some future date, when market conditions have stabilized - a frequent occurrence when junk bond deals are spiked due to "market conditions," only to return months later (and in some cases, weeks later) . Pinto acknowledged that such a scenario was always possible, and that should Oxford revisit the market at some later date, it would - market conditions permitting - go back to square one and craft a new deal, rather than merely stick with the format of the shelved deal.

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