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If you assume that the "other assets" are not collectable or are otherwise not available for distribution and if you assume all of the "other liabilities" are in fact going to survive (which is the most conservative approach) then you have it pegged about right.
I know that each case presents it's own set of challenges but in Chemtura there were EPA claims of over $2 billion and Diacetyl claims in the hundreds of millions and product liability claims of $9 billion so it was no cakewalk. You are correct that the posture of the Debtors plays a big role but just understand that in Chemtura the Debtors counsel was downright adversarial with those of us who fought for the equity committee and the relationship between the EC and Debtors was also contentious and strained. But it was only strained because that EC and counsel made a fair amount of noise on behalf of its constituents. In this case it didn't appear contentious because the debtors did whatever they wanted without much of a fight from our guys. From the outside looking in it appeared to me to be a go along to get along attitude and it will get you steamrolled every time. The EPA and management will be receiving the recovery that shareholders should have been partially entitled to and that is the bottom line. Success and failure is defined by recovery of a constituency and our guys didn't get it done. They may be able to sit under the dinner table now where the big boys and girls are eating and beg for scraps that may return value above where the stock trades now but it will pale in comparison to what it could have been.
Visteon got what they got without an official court appointed committee and the activists involved in Smurfit managed to get 2.5% Newco recovery for both common and preferred when the balance sheets were insolvent by more than a billion dollars. They didn't have an official committee either.
It will be very interesting to see what the statutory committee here is able to get. For some of these legal firms that want to get retained in future endeavors they need a good track record. I know that if I am part of a beauty pageant judging who represents my official committee I want someone who had success when the odds were stacked against them and I am less impressed with those who had the skids greased (i.e official committee representation). Anyone trying to get past me will need to be prepared to answer for past failures and will need to answer as to why passivity was chosen when "aggressive" and "vigorous" didn't even begin to properly describe the level of representation that was necessary and most appropriate.
I've bit my tongue for several months on this one but while I am on my soap box I have to mention that throughout the first 8 months of 2010 that transpired before the EC was allowed to file its own plan, there were 8 documents filed by the EC attorneys and 7 of the 8 dealt either with retention or compensation of professionals representing the EC. That is 7 out of 8 over the course of 8 long, arduous, value and wealth destructing months and the only other filing was a joinder motion piggybacking off someone else's work. Until the filing of the EC POR and the saving of about $16 million in backstop fees due to competitive bidding, the words "meaningful contribution" didn't exactly come to mind when thinking of our representation. Those are the words that are paramount to them getting paid but the words we as shareholders are looking for are "meaningful distribution" and so far our representatives have failed to deliver that.
Warrants struck at 50% above plan value when you have a statutory committee in place for all but 2 months of the case is not exactly what I would call "success".
I see you working, and you're learning fast. Digging through the monthly fee applications is a great source of information and direction of the case for those who are diligent enough. However, there is nothing to read into this round of billings from UBS because the billing period is only up through and including June 30, 2010. Even if the Judge had rendered his decision by now and it was at a level that would trigger a "transaction fee" as defined by their engagement letter, we would see no evidence of such in this round of billings.
Do you do distressed debt/equity often or is this a new venture? The only reason I ask is that if you know there are new fee applications on the docket right now then you are either on the master service list or in touch with someone on the list and someone new to distressed would not know to do this. These applications have not yet hit KCCLLC.
Stick around, we always welcome anyone who will dig around and help find the good stuff. After 2 straight years of covering numerous bankrupt companies at any given time, I find myself hitting the burnout phase much more frequently. I know I definitely don't have the inclination to review all 21 of those fee applications this evening.
Welcome. You make some valid points. The increased volume with a downward bias in the share price certainly does give me some pause. I always like to see price increasing with higher than normal volume, not the opposite. I also did not like the idea of going to arbitration because of the increased timetable coupled with the potential for several months of additional cash burn. I would have preferred a ruling last week so that the Plan of Reorg could go forward, sooner rather than later. Now it looks like we have to wait until November to even see the first iteration of the POR.
My guess is that even if we get a POR in November, we probably can't get an equity distribution until the PAR claim is finalized in January or February 2011. I can only guess, but the timing of the selloff on Friday might have been by someone who didn't want to be holding securities that are essentially dead money for the next 4 to 5 months. It is true that there has been some nice bid support but there has also been some overhead resistance so it has been frustratingly rangebound for months on end. I think equity is still "in the money" here but holding this stock is not a "risk free" proposition and it requires a ton of patience.
I am sure your letter was received but the Judge decides whether these letters hit the docket or not. I spoke with a court clerk from the SDNY and it was confirmed that sometimes a Judge will instruct the administrative staff not to simply post all letters to the docket but instead forward them to him/her for a preliminary review. I ran into this in the Tronox case because I had submitted a letter (on two occasions) to request that the Debtors file a 2015.3(a) disclosure that was required but never filed. My first attempt was by certified letter and the second attempt was done thru an attorney by electronic submission. After two unsucessful attempts to get it docketed, I forwarded it along to a hedgefund who submitted an identical request in their own name and after several weeks, their letter was finally docketed. I was never contacted about the lack of posting of my letter so I began to inquire as to why it was not posted and was told that the Judge had either been on vacation or he simply didn't want it on the docket. In the end, the 2015.3(a) report was discussed at one of the omnibus hearings and was eventually filed by the Debtors so I was satisfied with the end result.
The way value flows to equity has to be viewed as a waterfall and it is commonly referred to as a "waterfall analysis". You have to envision the admin claims and credit claims etc. as folks who are above you in the waterfall. If their buckets never get filled, there is tyically nothing that trickles down to equity although there are rare circumstances where some value is carved out for equity that is hopelessly insolvent (see the Smurfit Stone Case). In the event that the buckets above you get filled then anything that flows past them collects in the equity pool that is distributed pro rata. In a liquidation, the pool is cash that gets distributed. In a reorg situation like this one, the pool will consist of some percentage of the new company. All things being equal, the larger the enterprise value is, the more "water" there is flowing in the waterfall. The smaller the claims turn out to be effectively means it takes less to fill the buckets above you and thus more value flows into your pool. There are a certain number of shares to be issued at emergence and the distribution of those shares will be done pro-rata based on the size of everyone's respective value pool/bucket.
As to your question about rejection of the plan by creditors if the company gets revalued, I guess they could but I doubt they do if the revaluation is as small as is contemplated. We are really only talking about a 10% revaluation here. I just don't buy the idea that the deal falls apart for such a small change. I simply see it as courtroom posturing which is necessary to support their own value assertion. The creditors and debtors had to act like it was doomsday to revalue it upwards in order to tow the line that they drew.
I think the two things that will impact upon recovery to shareholders at this point are cash burn and any amounts awarded to PAR by the 3 member arbitration panel. The limitation of the PAR claim to a range of $0 to $3.5 million goes a long way to help ensure that equity will receive a distribution.
Remember that the Management Incentive Plan does not afford any payout unless there is at least $7.5 million available for distribution to equity. The amounts payable under the MIP will be deducted from the residual equity to determine final payout to equity. If you extract the $750,000 payable under the MIP from the 7.5 million minimum distribution you get a $6.75 million distribution to equity. This equates to about $0.078 on a per share basis.
I could be wrong in my thinking but I see this recovery as a worst case scenario because I just don't see management agreeing to any settlement that would put their MIP distribution in jeopardy.
The way this MIP was structured presents an interesting scenario in itself since it calls for hard dollar awards within a range as opposed to a percentage of the equity recovery. As an example, if there were only $7.45 million available for equity (before factoring in the MIP) then the MIP does not payout anything to management and the equity recovery is 700k more because equity value fell 50k short of the $7.5 million level. This same conundrum occurs at each of the various payout levels in $2.5 million increments all the way up to $25 million and it creates an incentive to potentially massage the settlements if they fall near one of the recovery thresholds. I am not leveling any accusations here, just making an observation.
There has been a bit of selling recently but there has also been someone sitting at just above $0.08 taking anything and everything offered at that price. Because of the lack of liquidity it is difficult to justify getting very big in the name but I am using it as a learning case study because the dynamics here are so different from the typical Chapter 11 case because it involves a liquidation scenario that includes an EC and an equity distribution. I just don't run across too many cases where liquidation and equity recovery can be uttered in the same breath. I also find it quite fascinating how "efficient" the pricing of this stock has been all along given the lack of coverage and lack of any apparent interest from retail, hedge or institutional players.
It wasn't a bluff at all. The court disallowed the termination fee for the funds backing the equity committee plan and it is my contention that the disallowance of this fee created a situation where the backstoppers didn't see value in going forward with the transaction on the equity side. These same funds were also lined up to support the company's equity commitment agreement. Which would you agree to back stop, the one that pays you a fee in the event that that deal doesn't go down or the one that you get nothing in the event that the deal doesn't go down? Funds providing capital for this deal will have to earmark capital and keep it available for a few months before it is used. They want to be paid for keeping the funds on the sideline and there is probably a premium to account for the fact that, relatively speaking, there is a limited market for this type of funding.
It basically outlines what apparently went on in court today. The company's disclosure statement was approved, and the equity committee's disclsoure statement was withdrawn. You can look at my prior two posts on this board to see what I have to say about all of that.
I was put of pocket today and didn't catch any of the action. I am just now catching up. My opinions haven't changed from last night. I don't like what I see because it doesn't make sense (absent a settlement) to pull your disclosure statement off the table if you are still relevant to the discussion and if you still have a financially backed plan. Looks like a valuation fight may be all that remains unless there is a settlement we don't know about.
News on PAR Claim:
http://www.kccllc.net/documents/1011485/1011485100930000000000004.pdf
Stipulation between the Debtors, Equity Committee and PAR Pharma includes the following provisions:
• The PAR claim will be heard by an arbitration panel;
• The PAR claim will be limited to a max possible recovery of $3.5 million, which is down from the $11.625 million they originally claimed to be entitled to; and
• Unless agreed otherwise, the arbitration hearing must be concluded by January 31, 2011 but the panel’s decision is not required to be rendered by this date.
I think the funding was there because there were signatures on the commitment documents. What changed was that the termination fee was disallowed by the court and these funds may have been unwilling to commit capital and keep it sitting on the sidelines without a fee in place in the event it cannot be put to productive use. Capital is the inventory of a fund and they make money by investing it. The termination fee was sort of a "going away present" for those who would put up capital to back an unconfirmed plan. The termination fee is essentially there as compensation for forebearance.
I don't know exactly what has occurred here today. I am not that plugged in so I can't say if the developments are positive or negative. If there is a settlement, it is likely a positive development. If the EC was in a situation where it had to scrap its plan due to funding deficiencies, that would obviously be negative. I just don't see where it makes any sense at all (absent any settlement) to withdraw all of your motions if there is any remaining chance that your equity commitment agreement and/or disclosure statement gets approved. Color me curious on that one.
It may be a bit early to speculate on any potential settlement but I will throw one out there. Perhaps the EC could negotiate warrants struck at an an implied Enterprise Value (EV) equal to the EC's plan EV as opposed to warrants struck at $450-$500 million above Debtors plan EV. We would still be holding "out of the money" paper (keeping the absolute priority rule intact) but warrants struck at the EC plan EV would only be 20% out of the money based on plan value and would likely have real value on a post emergence basis because this entity can and likely will trade at the EC's plan EV but barring an irrationally exuberant market, this company may never trade at a level that brings the currently proposed warrants into the money.
And just know that it does not please me to even be having this conversation. It disgusts me to be talking about warrants. Based on the cash payout given to the EPA, equity could have been in the money by $150 million or more even without a rights offering were it not for the abject greed of the EPA made manifest in their unwillingness to accept $115 million to forgive indirect liabilities. I guess they had to take their anger out on Tronox because of their colossal failure in their attempts to extract adequate value from Chemtura, Solutia, Lyondell etc. I would love to opine some more but I would just get even more incensed.
I am not seeing or hearing anything other than what is on the docket. Looks to me like they either settled or the EC financing dried up. The EC would not withdraw months worth of work to simply change a few minor details in their plan and DS. If the funding dried up then it would appear that the ECs only remedy might be to prepare for a valuation fight at confirmation much like what is going on down the hall with Chemtura.
Blogpost: ...And Now We Wait
http://chemturaresearch.blogspot.com/2010/09/and-now-we-wait.html
I think it relates to the POS-AM and 8-k filings from last Thursday confirming the effectiveness of the rights offering termination. There was also an EFFECT filing on the heels of the registration statement back in late August. I don't see where this is anything new or anything to be concerned about.
It would have been a nice show of support to have voluntarily dispensed with the termination fee but that is a moot point since the court disallowed it. The most important issue now would be the valuation of the company. If they would have gotten the termination fee approved but got the valuation wrong then it would have all been for naught. In order for equity to have a shot at a better recovery then the EC will have to win its valuation fight. Another possibility might be for some sort of settlement between the EC and the Debtors but that would likely be somehow tied to the avoidance of a valuation fight. Based on the transcripts, it looks like the confirmation hearing (and related valuation fight) will not occur until around November 17th but that is not a court approved date as of yet.
The hearing has been postponed until Wednesday, September 29, 2010 at 2:30 Eastern.
It is exhibit A to document #4129 which relates to the Diacetyl reserve. Nothing to get too worked up about. We've known all along that there were certain things about the Diacetyl settlements that would never be released publicly.
After reading 700 something pages of transcripts from the last few days it looks like the internal EC emails referencing Wall will be a non issue for valuation purposes. What is at question that is of interest is simply the valuation and on that front the credibility issue on the equity side resides with UBS. Certain parties would like to portray UBS as a group that is not independent because they think they artificially inflate value so that they get a higher fee. However, the fees UBS might get in this case are so small relative to their global revenues that it should be a non issue. The notion that UBS would risk it's reputation as a respected firm to inflate Chemtura's valuation for a few million dollars, quite frankly, strains credulity.
The other issue of prime interest to shareholders is the make whole provision. In the Calpine case last week, a district court disallowed such fees. While Gerber does not have to render the same decision, it sets a very recent precedent within the SDNY that the judge will carefully weigh. The verbiage in the transcripts indicated that had the decision been rendered before the Chemtura PSA was adopted, then the make whole perhaps would not have been included. In any event, Debtors counsel seemed to indicate that the makewhole issue might still be an open door but the Judge will be the final arbiter. The disallowance in full would represent an additional $70 million or $0.29 per share to current shareholders..
Wall, You feeling like another trip to NY? I had a vision just a few minutes ago of a court document that had a title of something like the following:
Motion of the Ad Hoc Equity Holders (or Chemtura Stockholder's Alliance) for entry of an Order to Subordinate the Equity Interests and Claims of Certain "Non Retail" Members of the Official Equity Committee.
What a bunch of DB's. Those guys may know the numbers but Wall/Mad/Jax could teach them a thing or two about how to navigate thru a Chapter 11 proceeding from the Equity side. You don't know how many times I wanted to call them out for the snowjob I felt like they delivered to us. At a minimum, we now have confirmation of intent to "Hijack" the process if the EC's plan term sheet wasn't already evidence enough. Who did they think they were kidding with that thing? Shame they never listened to us unsophisticated retail guys. Now I wouldn't even take their phone calls. What a difference a year makes.
But then again, this is "what Alan does best".
...and that would be a checkmate to all of your detractors. All who sat on the sidelines complaining about you should now come forward and apologize. That long line forms to the left...
And if you dont protect your divided house when under attack then you have no stones ;)
The MOR is in line with what they have been reporting. EBITDAR looks to be in the $14 million range but the import of the MOR pales in comparison to what is playing out in court and on the docket. Today we saw objections from the UCC and the debtors that were in line with the objections and reservations raised in court last week. Conceivably, the stock ran up on the hope that the ruling on the Debtors ECA would either be delayed til Thursday or that it would be disallowed due to fees that were thought to be outside of market tolerance. The retracement is likely due to the developments that ultimately led to court approval of the Debtors ECA last week.
In court last week a group of Investors that were/are backing the EC plan made a new offer to sweeten the pot as far as ECA and rights offering are concerned then the ad hoc bondholders responded by improving their offer which included removing the preferred tranche from the ECA and also decreasing the discount at which their rights offering was struck. Instead of valuing the rights offering at $700 mm I believe it is now $875 mm. These renegotiated terms found favor with the court and the debtors ECA was approved.Now that the debtors ECA is approved with an $11 mm backstop fee it will be up to the EC to convince the court that their backstop fee is also necessary and a reasonable use of the estates assets. There has been and will continue to be vigorous opposition to the backstop fee in the EC's ECA unless the EC can get support for their plan from other parties in interest. Without this support, it is unlikely that the EC wins support for it's backstop fee. Lack of support for the backstop fee is a setback unless those that have signed on to support the EC's ECA are willing to continue to do so without a guaranteed fee in place.
If the EC and it's plan supporters want to show the court that the plan value of $1.25 billion they call for is legitimate then they need to agree to support the plan without a backstop fee. It is put up or shut up time. The EC supporters made their bet, the ad hoc group called and raised, so now we will find out if the EC supporters are bluffing or if they are for real. IMO, this is the only way to advance their position now that the ad hoc group has made significant and very meaningful concessions. This is not rocket science. If you are not dealing from a position of leverage or strength and you do not enjoy the benefit of support from creditors or debtors and you are trying to stretch the limits of plan value and distribution (i.e. "who gets what") then you must go above and beyond to sweeten the pot further. I hope the EC supporters are prepared to do this in order to provide support for their numbers.
We shall see on Thursday.
About forty-five cents on a per share basis or one hundred and ten million dollars in total equity value ;)
Chemtura August 2010 MOR
http://chemturaresearch.blogspot.com/2010/09/chemtura-mor-august-2010.html
It is about as I expected it would be. They have to paint the bleakest picture possible because of the "fragile" negotiations, lol. The part about including equity in all discussions and "bending over backwards" is nothing short of laughable. The EC is on record a number of times regarding being left out of discissions and in the dark. This will play out in court, as it should.
Some info on MBRKQ for those interested:
Here is a case summary. It is a bit dated but still relevant in terms of getting up to speed. I have revised the equity recovery downward by a few cents because the cash burn rate picked up when all of the attorneys came on board but there appears to still be a meaningful recovery for equity.
http://www.scribd.com/doc/33888674/MBRKQ-Case-Summary-Updated-07-03-10
More recent happenings:
Transcript summary from August 26, 2010:
http://www.kccllc.net/documents/1011485/1011485100913000000000002.pdf
Looks like:
POR & Disclosure Statement were supposed to be filed last week
September 30 will be the PAR claim hearing
October 19 would be the preliminary POR hearing date but since they didn't file the POR last week they may not make the 28-day notice requirement in time to have the confirmation on this date. I would look for the Plan & DS to be filed this week or very early next week if they want to have October 19 as the confirmation date.
Remember: The POR goes to the court for confirmation on Thursday, September 16 at 9:45 A.M. Eastern.
Good Luck to All
Tronox Equity Committee Seeks Court Approval for $185 Million Backstopped Equity Commitment Agreement
http://tronoxequity.blogspot.com/2010/09/tronox-equity-committee-seeks-court.html
On Tuesday, September 14, 2010, the Official Equity Committee of Tronox Inc. filed a motion (linked below) seeking court approval of its own Equity Commitment Agreement which includes a $185 million backstopped rights offering as part of its Plan of Reorganization. Along with this motion, they also both sought and received court approval for a motion to shorten the notice and timing requirements so that both the Debtor’s and the Equity Committee’s Equity Commitment Agreements can be heard at the same hearing. As it now stands, the Omnibus Hearing to consider the respective and competing Disclosure Statements and Equity Commitment Agreements will be held on September 23, 2010. The deadline to object to the Equity Committee’s Equity Commitment Agreement is September 21, 2010.
In the Equity Committee’s initial Plan of Reorganization they had contemplated a rights offering of $135 million but bow that they have obtained full commitments from enough backstopping parties for the full $185 million, they have indicated that they will be filing an amended plan to reflect these additional commitments that support the confirmability of their plan. The fact that the Equity Committee has the full and confirmed financial backing of the backstopping parties and the fact that all parties except the Ad Hoc Bondholders will receive a greater recovery under their plan is tantamount to providing a vastly superior alternative to the absurdly larcenous plan put forth by the Debtors that inexplicably favors the ad hoc bondholders. Now that the Equity committee has obtained financial backing for its plan there will be no further need for the Debtors to “gift” windfall profits to the Ad Hoc Bondholders at the expense of the remaining General Unsecured Creditor and Equity Constituencies.
As revealed in the filing, the backstopping parties to the Equity Committee’s $185 million Equity Commitment Agreement who have signed on the dotted line now include:
Oak Hill Advisors
Cetus Capital
P. Schoenfeld Asset Management
Avenue Investments
Avenue International
Avenue-CDP Global Opportunities Fund
Avenue Special Situations Fund VI
Lagrange Capital
KVO Capital
Ahab Capital
Cheever Partners
The following passage from the filing summarizes the key provisions of the Equity Committee Plan, including certain comparisons to the Debtors’ Amended Plan:
• The Equity Committee Plan is based on a valuation range of $1.2 to 1.3 billion, with a midpoint of $1.25 billion. This valuation better reflects the true value of Reorganized Tronox, which is not reflected in the midpoint valuation of $1.063 million that forms the basis of the Debtors’ Amended Plan.
• Under the Equity Committee Plan, 54% of the New Common Stock will go to Holders of Allowed General Unsecured Claims, as compared to 16.9% under the Debtors’ Amended Plan.
• Both the Equity Committee Plan and the Debtors’ Amended Plan are employing a rights offering process, which will enable certain stakeholders to purchase new equity in Reorganized Tronox. In both the Equity Committee Plan and the Debtors’ Amended Plan, all holders of General Unsecured Claims (including Unsecured Note Claims) in excess of $250 and all Holders of Indirect Environmental Claims in excess of $500 will be given the opportunity to participate a rights offering to purchase new equity in the reorganized company. Parties electing to participate in both rights offerings will be able to commit funds to be applied to whichever offering is eventually consummated. Funds committed to an offering that is cancelled will be returned, without interest, pursuant to normal procedures.
• Unlike the Debtors’ rights offering, the Equity Committee’s rights offering would also include a second stage offering to shareholders. This portion of the Equity Committee’s rights offering would commence only in the event that the Equity Committee Plan is confirmed. The joint offering to creditors pursuant to both rights offerings, on the other hand, would commence and conclude prior to confirmation of either plan.
• The Equity Committee and its financial advisors believe that the Debtors’ Amended Plan significantly undervalues Reorganized Tronox. As a result, under the Debtors’ Amended Plan, an inappropriately high portion of the New Common Stock will be distributed to the Bondholder Backstoppers to the detriment of all of the other creditors and equity interest holders in this case.
• The Equity Committee Plan seeks to preserve the settlements reached with the Governmental Environmental Entities and the Holders of Tort Claims and will provide those entities with an equal or greater recoveries than that which they would otherwise receive in the Debtors’ Amended Plan.
• The Equity Committee Plan also provides the necessary financing for Reorganized Tronox’s operations post-emergence.
Additional information from the filing is as follows:
• Under the Equity Committee Plan, creditors are able to purchase a total of [30.4]% of the New Common Stock in Reorganized Tronox, subject to dilution, for a total price of $[122.1] million.
• Shareholders are able to purchase a total of [15.6]% of the New Common Stock in Reorganized Tronox, subject to dilution, for a total price of $[62.9] million.
• The Equity Committee Plan provides for the issuance of no less than [43,434,783] shares of new common stock, [18,500,000] shares of which will be issued pursuant to the Equity Committee Rights Offering and [23,454,783] shares of which will be issued to Holders of Allowed Unsecured Claims as set forth in Article III.B of the Equity Committee Plan.
• The Equity Committee Rights Offering will be backstopped by certain signatories, and pursuant to the term of, to that certain Equity Commitment Agreement, dated as of September [ ], 2010, which provides for the sponsorship and backstop for the Equity Committee Rights Offering, as the same may be modified, amended or supplemented (collective, the “Equity Committee Sponsors”). The Equity Committee Sponsors have committee to purchasing all shares of New Common Stock that are not purchased by Eligible Holders pursuant to the Equity Committee Rights Offering. As a premium for its commitment to purchase such shares, if the Equity Committee Rights Offering is consummated, the Equity Committee Sponsors will be granted [1,480,000] shares in New Common Stock (which is approximately [3.4]% of the New Common Stock in Reorganized Tronox, subject to dilution). If the Equity Committee Rights Offering is not consummated, the Equity Committee Sponsors will be granted a break-up fee of $[11.1] million.
To view the full filing click the link below:
http://www.kccllc.net/documents/0910156/0910156100914000000000025.pdf
MBRKQ Transcript from August 26, 2010 Hearing
http://www.kccllc.net/documents/1011485/1011485100913000000000002.pdf
Looks like:
POR & Disclosure Statement were supposed to be filed last week
September 30 will be the PAR claim hearing
October 19 would be the preliminary POR hearing date but since they didn't file the POR last week they may not make the 28-day notice requirement in time to have the confirmation on this date. I would look for the Plan & DS to be filed this week or very early next week if they want to have October 19 as the confirmation date.
MBRKQ Transcript from August 26, 2010 Hearing
http://www.kccllc.net/documents/1011485/1011485100913000000000002.pdf
Looks like:
POR & Disclosure Statement were supposed to be filed last week
September 30 will be the PAR claim hearing
October 19 would be the preliminary POR hearing date but since they didn't file the POR last week they may not make the 28-day notice requirement in time to have the confirmation on this date. I would look for the Plan & DS to be filed this week or very early next week if they want to have October 19 as the confirmation date.
Tronox Equity Committee Seeks Court Approval for $185 Million Backstopped Equity Commitment Agreement
http://tronoxequity.blogspot.com/2010/09/tronox-equity-committee-seeks-court.html
On Tuesday, September 14, 2010, the Official Equity Committee of Tronox Inc. filed a motion (linked below) seeking court approval of its own Equity Commitment Agreement which includes a $185 million backstopped rights offering as part of its Plan of Reorganization. Along with this motion, they also both sought and received court approval for a motion to shorten the notice and timing requirements so that both the Debtor’s and the Equity Committee’s Equity Commitment Agreements can be heard at the same hearing. As it now stands, the Omnibus Hearing to consider the respective and competing Disclosure Statements and Equity Commitment Agreements will be held on September 23, 2010. The deadline to object to the Equity Committee’s Equity Commitment Agreement is September 21, 2010.
In the Equity Committee’s initial Plan of Reorganization they had contemplated a rights offering of $135 million but bow that they have obtained full commitments from enough backstopping parties for the full $185 million, they have indicated that they will be filing an amended plan to reflect these additional commitments that support the confirmability of their plan. The fact that the Equity Committee has the full and confirmed financial backing of the backstopping parties and the fact that all parties except the Ad Hoc Bondholders will receive a greater recovery under their plan is tantamount to providing a vastly superior alternative to the absurdly larcenous plan put forth by the Debtors that inexplicably favors the ad hoc bondholders. Now that the Equity committee has obtained financial backing for its plan there will be no further need for the Debtors to “gift” windfall profits to the Ad Hoc Bondholders at the expense of the remaining General Unsecured Creditor and Equity Constituencies.
As revealed in the filing, the backstopping parties to the Equity Committee’s $185 million Equity Commitment Agreement who have signed on the dotted line now include:
Oak Hill Advisors
Cetus Capital
P. Schoenfeld Asset Management
Avenue Investments
Avenue International
Avenue-CDP Global Opportunities Fund
Avenue Special Situations Fund VI
Lagrange Capital
KVO Capital
Ahab Capital
Cheever Partners
The following passage from the filing summarizes the key provisions of the Equity Committee Plan, including certain comparisons to the Debtors’ Amended Plan:
• The Equity Committee Plan is based on a valuation range of $1.2 to 1.3 billion, with a midpoint of $1.25 billion. This valuation better reflects the true value of Reorganized Tronox, which is not reflected in the midpoint valuation of $1.063 million that forms the basis of the Debtors’ Amended Plan.
• Under the Equity Committee Plan, 54% of the New Common Stock will go to Holders of Allowed General Unsecured Claims, as compared to 16.9% under the Debtors’ Amended Plan.
• Both the Equity Committee Plan and the Debtors’ Amended Plan are employing a rights offering process, which will enable certain stakeholders to purchase new equity in Reorganized Tronox. In both the Equity Committee Plan and the Debtors’ Amended Plan, all holders of General Unsecured Claims (including Unsecured Note Claims) in excess of $250 and all Holders of Indirect Environmental Claims in excess of $500 will be given the opportunity to participate a rights offering to purchase new equity in the reorganized company. Parties electing to participate in both rights offerings will be able to commit funds to be applied to whichever offering is eventually consummated. Funds committed to an offering that is cancelled will be returned, without interest, pursuant to normal procedures.
• Unlike the Debtors’ rights offering, the Equity Committee’s rights offering would also include a second stage offering to shareholders. This portion of the Equity Committee’s rights offering would commence only in the event that the Equity Committee Plan is confirmed. The joint offering to creditors pursuant to both rights offerings, on the other hand, would commence and conclude prior to confirmation of either plan.
• The Equity Committee and its financial advisors believe that the Debtors’ Amended Plan significantly undervalues Reorganized Tronox. As a result, under the Debtors’ Amended Plan, an inappropriately high portion of the New Common Stock will be distributed to the Bondholder Backstoppers to the detriment of all of the other creditors and equity interest holders in this case.
• The Equity Committee Plan seeks to preserve the settlements reached with the Governmental Environmental Entities and the Holders of Tort Claims and will provide those entities with an equal or greater recoveries than that which they would otherwise receive in the Debtors’ Amended Plan.
• The Equity Committee Plan also provides the necessary financing for Reorganized Tronox’s operations post-emergence.
Additional information from the filing is as follows:
• Under the Equity Committee Plan, creditors are able to purchase a total of [30.4]% of the New Common Stock in Reorganized Tronox, subject to dilution, for a total price of $[122.1] million.
• Shareholders are able to purchase a total of [15.6]% of the New Common Stock in Reorganized Tronox, subject to dilution, for a total price of $[62.9] million.
• The Equity Committee Plan provides for the issuance of no less than [43,434,783] shares of new common stock, [18,500,000] shares of which will be issued pursuant to the Equity Committee Rights Offering and [23,454,783] shares of which will be issued to Holders of Allowed Unsecured Claims as set forth in Article III.B of the Equity Committee Plan.
• The Equity Committee Rights Offering will be backstopped by certain signatories, and pursuant to the term of, to that certain Equity Commitment Agreement, dated as of September [ ], 2010, which provides for the sponsorship and backstop for the Equity Committee Rights Offering, as the same may be modified, amended or supplemented (collective, the “Equity Committee Sponsors”). The Equity Committee Sponsors have committee to purchasing all shares of New Common Stock that are not purchased by Eligible Holders pursuant to the Equity Committee Rights Offering. As a premium for its commitment to purchase such shares, if the Equity Committee Rights Offering is consummated, the Equity Committee Sponsors will be granted [1,480,000] shares in New Common Stock (which is approximately [3.4]% of the New Common Stock in Reorganized Tronox, subject to dilution). If the Equity Committee Rights Offering is not consummated, the Equity Committee Sponsors will be granted a break-up fee of $[11.1] million.
To view the full filing click the link below:
http://www.kccllc.net/documents/0910156/0910156100914000000000025.pdf
Tronox Equity Committee Seeks Court Approval for $185 Million Backstopped Equity Commitment Agreement
http://tronoxequity.blogspot.com/2010/09/tronox-equity-committee-seeks-court.html
On Tuesday, September 14, 2010, the Official Equity Committee of Tronox Inc. filed a motion (linked below) seeking court approval of its own Equity Commitment Agreement which includes a $185 million backstopped rights offering as part of its Plan of Reorganization. Along with this motion, they also both sought and received court approval for a motion to shorten the notice and timing requirements so that both the Debtor’s and the Equity Committee’s Equity Commitment Agreements can be heard at the same hearing. As it now stands, the Omnibus Hearing to consider the respective and competing Disclosure Statements and Equity Commitment Agreements will be held on September 23, 2010. The deadline to object to the Equity Committee’s Equity Commitment Agreement is September 21, 2010.
In the Equity Committee’s initial Plan of Reorganization they had contemplated a rights offering of $135 million but bow that they have obtained full commitments from enough backstopping parties for the full $185 million, they have indicated that they will be filing an amended plan to reflect these additional commitments that support the confirmability of their plan. The fact that the Equity Committee has the full and confirmed financial backing of the backstopping parties and the fact that all parties except the Ad Hoc Bondholders will receive a greater recovery under their plan is tantamount to providing a vastly superior alternative to the absurdly larcenous plan put forth by the Debtors that inexplicably favors the ad hoc bondholders. Now that the Equity committee has obtained financial backing for its plan there will be no further need for the Debtors to “gift” windfall profits to the Ad Hoc Bondholders at the expense of the remaining General Unsecured Creditor and Equity Constituencies.
As revealed in the filing, the backstopping parties to the Equity Committee’s $185 million Equity Commitment Agreement who have signed on the dotted line now include:
Oak Hill Advisors
Cetus Capital
P. Schoenfeld Asset Management
Avenue Investments
Avenue International
Avenue-CDP Global Opportunities Fund
Avenue Special Situations Fund VI
Lagrange Capital
KVO Capital
Ahab Capital
Cheever Partners
The following passage from the filing summarizes the key provisions of the Equity Committee Plan, including certain comparisons to the Debtors’ Amended Plan:
• The Equity Committee Plan is based on a valuation range of $1.2 to 1.3 billion, with a midpoint of $1.25 billion. This valuation better reflects the true value of Reorganized Tronox, which is not reflected in the midpoint valuation of $1.063 million that forms the basis of the Debtors’ Amended Plan.
• Under the Equity Committee Plan, 54% of the New Common Stock will go to Holders of Allowed General Unsecured Claims, as compared to 16.9% under the Debtors’ Amended Plan.
• Both the Equity Committee Plan and the Debtors’ Amended Plan are employing a rights offering process, which will enable certain stakeholders to purchase new equity in Reorganized Tronox. In both the Equity Committee Plan and the Debtors’ Amended Plan, all holders of General Unsecured Claims (including Unsecured Note Claims) in excess of $250 and all Holders of Indirect Environmental Claims in excess of $500 will be given the opportunity to participate a rights offering to purchase new equity in the reorganized company. Parties electing to participate in both rights offerings will be able to commit funds to be applied to whichever offering is eventually consummated. Funds committed to an offering that is cancelled will be returned, without interest, pursuant to normal procedures.
• Unlike the Debtors’ rights offering, the Equity Committee’s rights offering would also include a second stage offering to shareholders. This portion of the Equity Committee’s rights offering would commence only in the event that the Equity Committee Plan is confirmed. The joint offering to creditors pursuant to both rights offerings, on the other hand, would commence and conclude prior to confirmation of either plan.
• The Equity Committee and its financial advisors believe that the Debtors’ Amended Plan significantly undervalues Reorganized Tronox. As a result, under the Debtors’ Amended Plan, an inappropriately high portion of the New Common Stock will be distributed to the Bondholder Backstoppers to the detriment of all of the other creditors and equity interest holders in this case.
• The Equity Committee Plan seeks to preserve the settlements reached with the Governmental Environmental Entities and the Holders of Tort Claims and will provide those entities with an equal or greater recoveries than that which they would otherwise receive in the Debtors’ Amended Plan.
• The Equity Committee Plan also provides the necessary financing for Reorganized Tronox’s operations post-emergence.
Additional information from the filing is as follows:
• Under the Equity Committee Plan, creditors are able to purchase a total of [30.4]% of the New Common Stock in Reorganized Tronox, subject to dilution, for a total price of $[122.1] million.
• Shareholders are able to purchase a total of [15.6]% of the New Common Stock in Reorganized Tronox, subject to dilution, for a total price of $[62.9] million.
• The Equity Committee Plan provides for the issuance of no less than [43,434,783] shares of new common stock, [18,500,000] shares of which will be issued pursuant to the Equity Committee Rights Offering and [23,454,783] shares of which will be issued to Holders of Allowed Unsecured Claims as set forth in Article III.B of the Equity Committee Plan.
• The Equity Committee Rights Offering will be backstopped by certain signatories, and pursuant to the term of, to that certain Equity Commitment Agreement, dated as of September [ ], 2010, which provides for the sponsorship and backstop for the Equity Committee Rights Offering, as the same may be modified, amended or supplemented (collective, the “Equity Committee Sponsors”). The Equity Committee Sponsors have committee to purchasing all shares of New Common Stock that are not purchased by Eligible Holders pursuant to the Equity Committee Rights Offering. As a premium for its commitment to purchase such shares, if the Equity Committee Rights Offering is consummated, the Equity Committee Sponsors will be granted [1,480,000] shares in New Common Stock (which is approximately [3.4]% of the New Common Stock in Reorganized Tronox, subject to dilution). If the Equity Committee Rights Offering is not consummated, the Equity Committee Sponsors will be granted a break-up fee of $[11.1] million.
To view the full filing click the link below:
http://www.kccllc.net/documents/0910156/0910156100914000000000025.pdf
Chemtura Equity Holders Vote to Reject the Plan of Reorganization
http://chemturaresearch.blogspot.com/2010/09/chemtura-classes-6-7-8-and-13a-plan-of.html
Thanks Faust. Nice to see you posting again.
GLTU
I only looked into CORSQ because someone came to my board and asked for an opinion. Since I had briefly looked at it because of the similarity between it and WAMUQ due to the tax refunds, I decided to respond. Outside of that, I don’t normally go to the “long only” IHUB boards dedicated to one stock unless I have something positive to say. Since I don’t share the opinions of the CORSQ stockholders I have limited my comments to this board. I looked into it as a possible investment idea but I just didn’t like what I saw. In the end it is just one man’s opinion.
You are correct that the 20-year discounted cashflow analysis of the NOLs would most likely only be relevant within the context of the normal rules under §382. However, if they use the special exceptions for chapter 11 bankruptcy you still have to discount the cash flows over the expected usage period and you have to consider the huge risks involved in pursuing that option. These risks certainly will be cause for an additional discount for uncertainty. If a subsequent ownership change occurs within 2 years after emergence they can lose some or all of the NOLs effectively rendering them valueless. That occurrence would serve to confound all of the hoops they had to jump through in order to preserve them in the first place. One also has to consider that using the normal rules may end up being more advantageous because these rules are less constraining when considering the cancellation of debt issue.
I just don’t subscribe to the idea that the shareholders “must be preserved” in order to preserve the NOLs. For an example, look no further than the Six Flags case where both the common and even all preferred shareholders were completely wiped out. In that case, they were able to preserve about $1.3 Billion in NOLs. See the NOL discussion on page 23 of the link below for the relevant Six Flags 10-Q discussing the NOLs preserved under their reorg plan:
http://www.sec.gov/Archives/edgar/data/701374/000110465910044639/a10-12956_110q.htm
Under § 382(l)(5) of the revenue code (in order to qualify for the exceptions afforded Chapter 11 debtors), shareholders do not have to be preserved so long as the qualified creditors own at least 50 percent of the total value and voting power of the reorganized debtor’s stock after the reorganization. To the best of my understanding, it is an “and/or” situation when considering who must be preserved (qualified creditors vs. shareholders). A“qualified creditor” is generally one who (a) has held its claim continuously since at least 18 months prior to the petition date or (b) has held a claim incurred in the ordinary course of the debtor’s business since the claim was incurred. In a scenario where the company wants to use the exceptions under § 382(l)(5) , the restructuring could be set up so that TOPrS holders are preserved but common shareholders receive no interest in the Newco and they still could preserve the NOLs. They will most certainly set it up so that they own more than 50% since they currently hold the lion’s share of the creditor claims.
Circumstances may arise where it is more beneficial and less risky to elect not to use the bankruptcy exception and go instead with the normal rules. Under the normal NOL rules, the “Ownership Change” definition under §382 is only concerned with the INCREASE at the 5% shareholder level. There is nothing that I can find under the normal rules of the code that limits the survival of NOLs in the event that common shareholders are not preserved because that would constitute a “decrease” not an “increase” in ownership.
As far as debt for equity conversion goes, I just don’t see any scenario where a creditor who holds a priority claim in bankruptcy would find it beneficial to waive its priority claim and allow itself to only be afforded common shareholder status due to an equity conversion. All of the other creditor claims would then be senior to them and that just doesn’t make sense to me.
The opinions expressed here are my own and certainly do not constitute tax advice. I have tried to summarize my understanding of the NOL rules based on what I have read in accounting trade periodicals, the internal revenue code and in the first day declarations of various chapter 11 cases. I have provided a few links below to some articles and filings that address these issues:
http://www.nysscpa.org/cpajournal/2007/307/essentials/p52.htm
http://www.gibbonslaw.com/news_publications/articles.php?action=display_publication&publication_id=2754
http://www.nysscpa.org/cpajournal/old/13808663.htm
http://www.law.cornell.edu/uscode/26/usc_sec_26_00000382----000-.html
http://www.bmcgroup.com/restructuring/DocView.aspx?ClientID=231&DocNumber=10&CaseNo=1-10-bk-26881
http://www.bmcgroup.com/restructuring/DocView.aspx?ClientID=231&DocNumber=9&CaseNo=1-10-bk-26881
GLTA and I hope the CORSQ investors get the recovery value they are hoping for.
I marked you as well, my friend. And likewise, I am surprised I had not done so already. I forget about such things from time to time.
Do you happen to know if the debt for equity swap that is talked about on the CORSQ board is voluntary or otherwise whose decision it is to convert? I haven't seen or read the TOPrS creation documents but I would just guess that if the conversion is/was at the discretion of the company that option would be removed in the event of default. If the choice to convert lies with the holder, I just don't see where it benefits them to go from being senior in the priority scheme and then convert themselves so that they are now Pari passu with a bunch of other stockholders who paid pennies for their shares.
The idea of stockholders getting $1 per share much less $10 per share seems a bit of a stretch when you think about how the TOPrS as primary creditors are taking a 40% haircut as a priority claimant but could somehow drop down in priority (while sharing their recovery with many others) and fall headlong into a windfall profit scenario.
Be careful on those NOL valuations because they are some of the most difficult assets to value due to the complexities of the tax code and the uncertainties of how the endgame will shake out. Just realize that no one is going to pay you dollar for dollar on them. Let’s say you have a $600 million NOL and a 34% tax rate. That gives you about $200 million of potential tax savings IF you have earnings to use it all. Then you have to multiply that number by the Federal LT Tax exempt rate which is currently 0.0399 to arrive at the annual usage cap which leaves an annual usage amount of about $8.14 million. Then you have to do a present value of cash flows on them over a 20 year period, which is the usage period, so each of the annual $8.14 million cash flows have to be discounted to present value. I would assume a discount rate of AT LEAST 15% to account for potential NOL expiration/impairment in the case where you don't have enough earnings to use the annual cap amount and you also have to assume some discount for time value otherwise you couldn’t entice a buyer. I show a present value of roughly $51 million in this scenario and that is overly aggressive because the NOLs are going to be reduced by any cancellation of debt income to include accrued and unpaid pre and post petition interest and the total NOL will be limited to the fair market value of the company at the time of emergence.
The company has put a value of $100 million on the NOLs but I suspect they are either using a much lower discount rate in the 5% to 6% range or they are projecting a value based on the assumption that an ownership change will not occur, that the surviving company will make full use of the NOLS before expiration and that they will not have to make any other reductions. I believe their assumption of value is questionable because it looks like the NOLs will be limited, at best, to a number much closer and probably less than the total asset number in the $300 million range (assuming the company keeps all of the tax refunds) even if someone comes riding in on a white horse with an equity injection. The IRS rules don’t typically allow new equity injections to count towards the new emergence value for the purposes of determining the amount of NOLs that survive.
CORSQ is an interesting case study, no doubt, I just have reservations about going up against the FDIC especially at a time when they are also insolvent. The FDIC had to go hat in hand to the taxpayers for additional borrowing lines 5x their normal levels because of how insolvent they are. They also revised the FDIC insurance premium calculations to generate more cash inflows from those insurance premiums and also required insured banks to prepay 3 years of assessments because of how insolvent the corporate FDIC fund is. Given their desperate need for cash I just see them continuing to play hardball with CORSQ in much the same way they have with WAMU because so many of their individual receivership pools have contributed heavily to the insolvency of the FDIC corporate structure.