July 14, 2016

Expect A Tightening Of Credit Market Spreads For Huntsman Corporation, and Market Expectations for an Expanding ROA’

HUN - CCFP - 2016 06 28

CDS and cash bond markets are exaggerating the credit risk of Huntsman Corporation (NYSE:HUN) with a CDS of 495bps and a cash bond YTW of 5.500%. Our fundamental analysis highlights a safer credit profile for HUN as the company’s cash flows would easily cover all their operating obligations. However, the company’s cash flows and cash on hand would fall short in the face of their 2019-2022 debt headwalls. That said, the firm’s robust recovery rate, capex flexibility and favorable management alignment suggest that they should be able to access credit markets to refinance, reducing credit risk. These factors drive our safer Intrinsic CDS of 191bps and our Intrinsic YTW of 3.180%.

Meanwhile, Moody’s is accurately stating HUN’s credit risk with their high-yield Ba2 credit rating, in line with our HY1 (equivalent to Ba2) rating.

pvp 6-28

HUN equity is trading at a V/A’ of 0.9x, in line with recent valuations. The market is expecting ROA’ to expand from last year’s 2% levels to 5%, with modest 1% Asset’ shrinkage going forward. Considering that consensus estimates project a continued ROA’ expansion and stabilization near cost-of-capital levels, expectations appear reasonable. Equity is therefore likely fairly valued. Additionally, even if the firm is only able to maintain the current environment or only slightly improve, current V/A’ below book value levels may offer a floor to valuations. Moreover, a ratings upgrade or tightening of credit market spreads could spur equity upside.

Click here to read the article in its entirety at Seeking Alpha.