NOVA Chemicals’ capital structure popped after the ethylene and polyethylene producer reported positive 3Q18 earnings and concurrently disclosed settlement discussions with Dow Chemicals, according to five sources familiar with the matter.

The materials maker reported that revenue for the three months ended 30 September rose 18% to USD 1.143bn from USD 968m generated during the corresponding period last year, the sources said.

Likewise, quarterly EBITDA jumped 18% to USD 346m from USD 293m a year earlier. The improvement was driven by greater profitability for its polyethylene segment, and offset by negative EBITDA from the newly acquired Geismar ethylene plant, they said.

NOVA noted as part of the earnings release that it entered into settlement talks with Dow Chemicals after a Canada judge in June awarded Dow at least USD 1.5bn in damages over a joint venture dispute, the sources said. The company appealed the decision shortly following the ruling.

NOVA’s USD 1.05bn 4.875% senior unsecured notes due 2024 traded up more than two points to 95.75 to yield 5.779% yesterday from 93 on 2 November, prior to earnings, according to MarketAxess. Its longer-dated USD 1.05bn 5.25% senior unsecured notes due 2027 traded up more than two points to 93.5 yielding 6.241% yesterday versus 90.625 on 2 November.

The issuer’s USD 500m 5% senior unsecured notes due 2025 traded yesterday at 94.063 to yield 6.123%, up more than two points from a print at 91.75 on 2 November, according to MarketAxess.

Investors are cautiously optimistic NOVA could cut litigation related expenses and lower the amount owed to Dow via a settlement, said the sources.

“I would assume [NOVA’s goal] would be to pay less, rather than spending money on lawyers. You can probably come to a conclusion that is mutually beneficial for both parties,” said one of the sources.

As of 30 September, NOVA’s liquidity totaled USD 1.984bn, including USD 865m of cash on hand, the sources said. The company ended the quarter with total leverage of 2.1x, based on an LTM EBITDA of USD 1.443bn and USD 3.1bn in total debt.

A settlement would also bring an end to a dispute that has been ongoing since 2006 between the two companies following the formation of a joint venture to operate an ethylene production plant in Alberta.

Specifically, Dow filed a lawsuit against NOVA alleging misuse of the products produced at the plant as well as failure to operate the plant at full production. NOVA, for its part, claimed an ethane feedstock shortage justified low production.

In ruling against NOVA, the judge required the company to pay USD 1.05bn to Dow for damages incurred between 2001 and 2012. The company is also on the hook for USD 501m in payments to Dow related to patent litigation.

Meanwhile, the judge has yet to rule on an additional USD 250m-USD 350m NOVA could pay for damages incurred from 2012 to 2015, the sources said.

Also disclosed as part of earnings, NOVA said a USD 250m dividend to parent Mubadala originally slated for 2H18 may instead be postponed to sometime in 1H19, said the sources. That implies the company may pay its parent two dividends next year.

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.

NOVA did not respond to a request for comment.

2018 Debtwire