Rhodia in a corner


French chemicals company Rhodia was last month forced by a group of investors, including some hedge funds led by Soros Fund Management, to reimburse a $290 million US private placement.

“By shorting the equity and going long the private placement, the hedge funds were able to play hardball and force Rhodia to take action that they did not want to do,” says Jens Jantzen, head of credit research at Bear Stearns.

The investors had been demanding early repayment of the bonds since late last year, claiming that Rhodia was in breach of financial covenants, thought to be debt-to-Ebitda ratios. The French firm had initially warned that it was in danger of breaching its covenants on the bonds in December.

One attraction of the bonds was that an accelerated repayment would be at a premium of 125% of face value, so investors holding the debt would receive €68 million on top of their initial investment.

“It was a very smart move,” says one investor about the strategy, something not lost on Jean-Pierre Clamadieu, Rhodia’s CEO, who described the outcome as “a good deal for the guys who invested in this type of debt back in November.”

The French firm finally agreed to the investors’ demands after it had published its results on Friday, February 13. The hedge funds have had to settle for payment in instalments as $145 million was paid at the end of February and the remaining balance will be paid by the end of June.

For Tobias Mock, high-yield analyst at HVB in Munich, Rhodia’s high leverage is not adequate for the risk associated with the cyclical and high capital-intensive chemical business. “We are still concerned about Rhodia’s operating business and see no turnaround in the next two years,” he says.

Mock believes that the triggers for a change in the current assessment will mainly be driven by a failure in the divestment process or the planned capital increase.

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