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Solvay: Initiating Coverage
Laurent Vergnault - Senior Analyst, Chemicals and Paper & Packaging
Felicity Juckes - Analyst, Chemicals and Paper & Packaging
EXECUTIVE SUMMARY
- We are initiating coverage of Solvay with a recommendation on the company’s new senior unsecured notes. The notes trade close to BBB3 peers Celanese and Lanxess despite lower fallen angel risk.
- The notes priced on 26 March 2024 at MS+115 for the 4Y and MS+165 for the 7.5Y, tightening some 40 bp from IPT on strong appetite. The notes still look attractive despite some tightening since their issuance, especially the 31s.
- Solvay delivered fairly resilient results in 4Q23 despite pressure on sales volumes. Adjusted EBITDA came in at €238 mn (+5.6% versus Bloomberg consensus estimates, and -24.5% YoY organically on a strong comparison base).
- Underlying net leverage came in at 1.2x at YE23, below expectation on lower net debt (€1.5 bn versus guidance of €1.7 bn during Solvay’s Capital Market Day).
- The outlook remains challenging for FY24, with Solvay guiding for a decline in underlying EBITDA between -10% and -20% YoY on a strong comparison base.
RELATIVE VALUE
We re-initiate coverage on Solvay (NR/BBB-/NR) in the secondary market following the issuance of two new 4Y and 7.5Y senior unsecured notes of €750 mn each on 26 March 2024. The notes will be used for the refinancing of its €1.5 bn bridge facility used for the redemption of its three hybrids at YE23 when executing its split plan.
The new bonds still look attractive despite some tightening since their issuance, especially the 31s. Solvay’s 28s trade at OAS of 115 bp (Bloomberg, on 27 March 2024), roughly in line with BBB3 peers Celanese (Baa3/BBB-▼/BBB-) and Lanxess (rated Baa3▼ by Moody’s) which face higher fallen angel risk than Solvay. The 31s trade at nearly 155 bp, close to the BBB3 curve and LXSGR’s bonds (except the 29s which trade particularly wide at 180 bp).
Solvay delivered relatively solid 4Q23 earnings despite challenging market conditions, albeit down 25% YoY, and it expects further normalization in 2024 (EBITDA down between -10% and -20% YoY on a strong comparison base). The company became concentrated on commodity chemicals after the separation from its Specialty business at YE23 (which became Syensqo), which is partly offset by good diversification through regions and end-markets, strong market positions. We also expect management to maintain a conservative financial policy supporting Solvay’s Investment Grade rating (net leverage at 1.2x at YE23).
FINANCIAL METRICS
Solvay (NR/BBB-/NR) issued two new 4Y and 7.5Y senior unsecured notes of €750 mn each on 26 March 2024 which will be used for the refinancing of its €1.5 bn bridge facility used for the redemption of its three hybrids at YE23 when executing its split plan.
The notes tightened significantly from IPT by some 40 bp down to MS+115 for the 4Y and MS+165 for the 7.5Y. At IPT levels, the notes looked very attractive in our view, while Solvay also benefited from strong appetite from investors over the recent weeks. Both notes still look attractive today despite some tightening since their issuance.
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