Go short Huntsman versus PolyOne, suggests Citi

In its latest High yield weekly report, Citi recommends selling five-year protection on PolyOne Corporation and buying protection at the same maturity on Huntsman. This yields a pick-up of 16 points, since PolyOne is trading at 28.75 points up front compare to Huntsman’s 12.75 points.

Citi says the differential between the two credits is not justified, noting that the two used to trade on top of each other at 40 points up front. Huntsman is the larger and more diversified of the two US chemical companies and has just received a $1.7 billion cash boost from settlement of its lawsuit against lenders to its abortive merger partner Hexion. However, the company’s leverage is 10 times compared to three times for PolyOne.

While both companies seem likely survivors, notes the report, there is uncertainty over what Huntsman will do with its excess cash. Several options, such as a share buy-back, dividends and acquisitions, would all be negative for credit investors.