NOT AN ANALYST

Synopsis Chemtura Corp is among the largest publicly traded chemical Companies in the United States, dedicated to the manufacturing and marketing of specialty chemical products. The Company filed for bankruptcy protection on March 18, 2009, as a result of a sharp decline in demand for its products and restricted access to credit. The Debtor has until June 2010 to file a plan of reorganization and it estimates to emerge from bankruptcy by the 3^rd Q of 2010.

Investment Thesis Buy the 7% 2009 notes as they provide an attractive risk/reward ratio compared to other debt in the capital structure. The notes trade around 107 cents on the dollar and have virtually no downside and have significant upside potential if converted into equity.

Valuation The Company is worth around $2,000 mm, which should cover all the unsecured debt and existing liabilities, including a large diacetyl claim. The valuation is based on 2009 EBITDA growth of 10% to 18% and a multiple of 7.72 derived from comparable Companies.

EBITDA In 2010, EBITDA will range between $285 and $300 mm, which represents a growth of 10% to 18% from 2009 levels. The growth is justified by a stronger demand for the Company’s products and emergence from bankruptcy. Peak cycle EBITDA was recorded around $400-450 mm during 2005-2007, but these level will be probably be attainable after 2015.

Multiple The 6.78 multiple represents an average of the EV/2010E EBITDA multiple extracted from Companies in the industry with similar fundamentals like market capitalization and debt (Albermale-ALB, Ashland-ASH and Lubrizol-LZ). I applied a 10% growth rate to the 2009 EBITDA level of the Companies analyzed. For reference, Chemtura’s market capitalization in 2007 was $1,050 and total debt to capital was 38.2%.

Capital Structure The DIP loan was refinanced at a lower rate on February 12 and increased by $50 mm to $450 mm to fund bankruptcy charges and ongoing capital requirements. The Term Loan, which constitutes part of DIP financing, has been fully drawn as of February 12. Borrowing under the 2007 Credit Facility were $154 mm as of January 31^st 2010, however this amount can increase following the drawing of certain letters of credit issued under the Facility. The 2009 notes and the 2016 notes are senior unsecured and guaranteed by certain subsidiaries. The 2026 notes senior unsecured parent Company notes and are not guaranteed by any subsidiary.  

2009 Notes Senior unsecured and guaranteed by Great Lakes Chemical, a subsidiary of the Debtor, which merged with Crompton Corp. to form Chemtura Corp. in 2005. In virtue of their maturity, the notes cannot be reinstated. In the worst case scenario, they’ll be repaid out at par plus post-petition interest. In the best case scenario, they’ll be converted to equity and participate in an upside potential materially above par.  

Other Liabilities The Debtor is subject to various other legacy liabilities, including environmental liabilities, estimated to be around $146 mm over 10 years, pension and OPEB (other-post-retirement-obligations) of about $172 mm. The Company, primarily through its non-Debtor subsidiary, Chemtura Canada, is also exposed to diacetyl litigation, estimated around $300 mm. Claims have been filed arguing that exposure to diacetyl, a chemical used to enhance and mimic food flavorings, caused workers to develop a disease that affected their lungs.

Risks The 2009 notes have virtually no downside risk. However, the risk of reinstatement for the 2016 and 2026 notes, will force repayment for the 2009 notes. The negative pledge clause in the notes would be triggered, so the notes would need to be reinstated as secured debt. In case of a debt to equity conversion, the creditors will have a lower claim on the Company’s assets if the Equity Committee will push for a high valuation above $2,500 mm.