NOVA Chemicals 25% YoY EBITDA gain softens blow of potential litigation costs, increased capex

NOVA Chemicals’ 2Q18 earnings growth gave its bonds a boost, bolstering investor optimism that it will be able to navigate the financial impact of ongoing litigation, said two sources familiar with the matter. The positive momentum will also help the company execute on growth plans scheduled to occur over the next few quarters.

The company’s USD 1.05bn 5.25% senior unsecured notes due 2027 traded up nearly two points to 96 yielding 5.836% on Wednesday (8 August) after the earnings call, while its USD 500m 5% senior unsecured notes due 2025 traded today at 96.75 to yield 5.586%, up nearly a point from a print of 95.875 on 2 August, according to MarketAxess.

The ethylene producer reported USD 376m of EBITDA, a 25% increase year-over-year from USD 301m, driven by higher volumes and more favorable pricing, especially in polyethylene. Quarterly revenue stood at USD 1.1bn, up roughly 28% from USD 863m generated during the corresponding period, sources said.

Still, investors remain somewhat on alert regarding liquidity, with the potential payment of damages to Dow Chemical, a healthy projected capex and a dividend payment to parent Mubadala expected to coincide in 2H18.

In 1997, NOVA entered into a joint venture agreement with Dow Chemical’s predecessor Union Carbide to operate an ethylene production plant in Alberta. In 2006, Dow filed a dispute against NOVA, alleging a failure to optimize production at the JV, while Dow claimed that an ethane shortage created the low production.

After years of disputes, a judge ruled in favor of Dow in June, requiring NOVA to pay approximately USD 1.06bn to Dow for damages incurred between 2001 and 2012. NOVA could pay an additional USD 250m-350m in damages for damages incurred from 2012 to 2015. NOVA appealed the decision in July.

“The appeal doesn’t hurt. Any delay works in their favor,” one of the sources said.

NOVA’s liquidity now stands at USD 1.75bn, including USD 621m of cash on hand, sources said. The company expects to maintain liquidity in the USD 650m-USD 850m range pro forma the USD 1.05bn payment to Dow and planned capex. Factoring in the additional litigation payment and USD 250m parent payment, sources estimates that liquidity would end up on the lower end of the guidance, or just below it.

Capex guidance for 2018 now totals USD 800m, reduced from USD 900m, due to USD 100m in deferred capex related to a new polyethylene plant.

NOVA is levered 2.3x, based on an LTM EBITDA of USD 1.35bn and USD 3.1bn in total debt, sources said.

The company last tapped the market in June 2017 for the 2027 notes to fund the acquisition of the Geismar ethylene plant from Williams Partners.

Calls to NOVA were not returned.

2018 Debtwire

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