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I haven't changed my opinion on the potential value of the company over the long-term. As far as I'm concerned the panic on this board is just a bunch of noise from folks who are rubbed raw from seeing the stock and their account balances take a nosedive, and I understand that completely because my account has taken a beating as well. I don't think the stock is driven by message board fodder though, at least not over the long-term. It may slide some more in the coming days or weeks but it will ultimately be worth what it is worth and the market will reflect the true value and there is nothing that message board content can do to change that over the long term.
Chemtura is a very solid company with a really bright future. Despite what some say about Rogerson, I believe he has done a great job of turning this company around. Just go look at the profitability of this company for the 3 to 4 years leading up to bankruptcy. Now Rogerson comes in and they are profitable while operating in bankruptcy while saddled with all of the legal costs. He has managed to streamline the operating divisions and restructure them for success. The notion that he sits up in some ivory tower pontificating on how to screw the investor is simply unfounded. Rogerson is not the one that is necessarily driving what is happening in the courtroom, he is busy running the business. Those are two completely separate full-time jobs. If you don’t like the direction of things in the courtroom, your beef might be with the Debtor’s general counsel or the Debtor’s financial advisors, not the CEO.
They have struck the EV at just over $2 Billion right now and that is fair (not ideal), but I can see a scenario develop to where on the high end, within 6 to 9 months after reorganization, the market could price in a valuation of $2.8 to $3.2 Billion based on 2011 estimated EBITDA of $400 million and a multiple of 7 to 8 times. This assumes the world doesn't fall off a cliff. Right now it is reasonable to assume that the $2.05 Billion value is derived from a multiple of 6.5 times the 2010 estimated EBITDA of $315 million. Given that the stock trades at a level above the value it would seem to have in the hands of someone who does not participate in the rights offering, it appears that current purchasers in the market see:
(1) greater post-reorg value that gets unlocked due to the market assigning a higher EBITDA multiple based on greater future EBITDA levels;
(2) additional value that is unlocked by participating in the rights offering;
(3) a more consensual plan negotiated by the EC between all other parties based on the current framework put forth by the Debtors that provides additional recovery; and/or
(4) an alternative plan that may or may not eventually be put forth by the EC
For now I am just waiting like everyone else to see what the equity committee comes up with. I do believe they will be able to argue for a better recovery if they have actually raised the kind of cash they claim to have raised.
The market always prices in extremes on the high and low side and I think we could be nearing the low end. When you see people writhing in pain, it is usually a sign that we have hit the max pain tolerance threshold. When this occurs we see indiscriminate selling which causes a "capitulation" point and this leads to very attractive entry points for the investors who are sitting in cash waiting for the stock price to reach a margin of safety. This goes on in the markets all the time and it causes a transfer of wealth to occur between the fearful and the opportunistic.
Pinky, I have also seen no documentation that substantiates the value of the Fitzgerald estate to be in excess of $1 Billion. I have sent messages to some folks who have publicly made such claims and have included my email address for them to send proof and I have not received a reply, only more conjecture. If someone wants to deliver something to me that substantiates the value, I will get it into the appropriate hands and will also remove the shroud of secrecy that surrounds the potential recoveries from the litigation. I will then move that we establish litigation tracking warrants (LTW's) to flow through to the current holders of Tronox common stock since we are the party in interest that has heretofore borne and will bear on a going forward basis the cost of administering the Fitzgerald case and these chapter 11 cases.
If there is truly something worth fighting for in that case then we could establish a litigation reserve to continue the efforts that would be funded by current equity holders from the proceeds of a rights offering. In the alternative, we might also get the debtors to give us LTWs sometime down the road as some kind of salve or balm that we can use in the event that they "tear us a new one" when they release the POR on or before July 12, 2010.
If someone is resourceful enough to track down the value of the Fitzgerald estate then they should be able to track down my email address and provide some proof.
MBRKQ Case Summary Updated 07.03.10
Here are some excerpts from the updated summary. The link to the full report can be found at the bottom of the post.
SYNOPSIS
Purchasing the equity of bankrupt MiddleBrook Pharmaceuticals, (MBRKQ) at the current market price of $0.11 is a compelling investment that could return over 60% to the investor in a relatively short timeframe (3 to 4 months). MBRKQ investors have their own statutory Equity Committee that was appointed on June 23, 2010. The Company has proposed and the Equity Committee has agreed to support a Management Incentive Plan (MIP) that does not begin to pay out pre-petition amounts owed or post-petition bonuses to management or employees until all creditors have been paid in-full and a minimum distribution to equity of $7.5 million occurs. The terms of the MIP could conceivably place a floor of value and limit the downside to about $0.08 (which happens to be the lowest price at which the stock has traded on a post-petition basis). I estimate that the funds available for distribution to equity after the §363 sale of substantially all of the company’s assets will be near $17 million or $0.18 on a per share basis.
EXECUTIVE SUMMARY
MiddleBrook Pharmaceuticals, Inc. is pharmaceutical company that sought protection from creditors under Chapter 11 of the Bankruptcy Code on April 30, 2010. On the filing date, the Company had no secured creditors and owed as much as approximately $16.8 million to its unsecured creditors. However, a large portion of the unsecured claims belong to Par Pharmaceutical, Inc. which has asserted a claim of approximately $11.6 million stemming from an unfulfilled development agreement. The official equity committee has indicated in court filings that it expects the claims of Par Pharmaceuticals to be disallowed in their entirety. When backing out Par's claim, the total unsecured claims are reduced to $5.2 million.
On May 11, 2010, the office of the United States Trustee (the "UST") appointed the Creditors Committee.
On June 9, 2010, the Court entered an order approving the sale of substantially all of the assets of the Company in a §363 sale to Victory Pharma who will serve as the stalking horse bidder. The stalking horse bid includes cash of $17.1 million, plus the assumption of about $750,000 in liabilities, according to court records. Competing bids are due on July 15, 2010. According to court filings, the Company is still in discussions with other interested purchasers.
On June 23, 2010 the Trustee appointed the Official Equity Committee.
Explanation of Value Revision
In my original summary I had estimated the distribution to equity would be about $0.09 per share. Admittedly, there is a wide variance between my current estimated recovery of $0.18 and the previous estimate. Originally, I based my valuation on the account balances reflected in the Monthly Operating Report (MOR) from May 2010. Upon further review of the court docket, the Debtors released their Schedule of Assets and Liabilities on June 1, 2010. This schedule excludes many accrued liability accounts that are reported on the MOR.
Given that the §363 sale appears to be moving forward and that end result appears imminent, the estate’s valuation is most appropriately viewed as a liquidating Chapter 11. As such, many of the accrued liabilities from the MOR are not truly items that have to be paid in cash or at all because the company will no longer be a going concern. My best estimate of what remains of the estate after the §363 sale will be a shell company with about $17 million in distributable cash & equivalents after satisfying all unsecured and administrative claims. The shell will also have an NOL carry-forward of $236 million. Given the uncertainty surrounding whether the estate could ever make use of or otherwise monetize the remaining NOLs, the $0.18 estimated recovery does not include any NOL value.
CATALYSTS AND RISKS
The biggest catalysts for recovery in this case include (1) higher bids emerging to compete with the stalking horse bidder, Victory Pharma; (2) an equity infusion to refinance the company as a standalone enterprise or (3) some other form of M&A transaction that seeks to preserve the enormous remaining net operating losses (NOLs). With the current market price for a share of stock of MiddleBrook Pharmaceuticals trading at $0.112 and a projected distribution of $0.183, it would appear that there may be more than 60% upside from current trading levels. In measuring the downside, I look to several issues that are discussed in more detail later in the report. Just briefly, with the proposed Management Incentive Plan (MIP) structured to begin paying out only upon payment in full to creditors and a residual value to equity of $7.5 million, it would appear that the downside could conceivably be measured at a per share distribution of $0.086.
The risks inherent in this case include the uncertainty surrounding liabilities that may potentially be owed to certain holders of MiddleBrook common stock who entered into Registration Rights Agreements in connection with a private placement of MiddleBrook stock during 2005 through 2008. Although the risk remains that the unsecured claims of PAR Pharmaceuticals totaling in excess of $11 million may be allowed, based on statements made in court filings it is expected that these claims that are currently reflected on the company’s books, will be disallowed in whole. If some or all of these claims are allowed, it could have a materially adverse impact on the distribution to holders of MiddleBrook common stock.
DISCLAIMER
The content provided herein is for informational and educational purposes only. In formulating this summary, the author had to make a number of assumptions and estimations. Because of the many uncertainties of the case, including the amount of claims that will survive the claims vetting process and the actual value of the final Asset Purchase Agreement, approximating the final distribution to equity holders is difficult if not altogether premature. None of the contents of this document should be construed as an offer or recommendation to buy or sell any security. The readers of this document should perform their own due diligence before taking any action and are encouraged to contact a financial advisor before making any investment decisions. This summary does not purport, and should not be construed, to advocate, solicit, encourage or discourage votes for any potential plan of reorganization for the Company. In full disclosure, the author is long MBRKQ common stock.
http://www.scribd.com/doc/33888674
MiddleBrook Pharmaceuticals (MBRKQ) Case Summary Updated 07.03.10
Here are some excerpts from the updated summary. The link to the full report can be found at the bottom of the post.
SYNOPSIS
Purchasing the equity of bankrupt MiddleBrook Pharmaceuticals, (MBRKQ) at the current market price of $0.11 is a compelling investment that could return over 60% to the investor in a relatively short timeframe (3 to 4 months). MBRKQ investors have their own statutory Equity Committee that was appointed on June 23, 2010. The Company has proposed and the Equity Committee has agreed to support a Management Incentive Plan (MIP) that does not begin to pay out pre-petition amounts owed or post-petition bonuses to management or employees until all creditors have been paid in-full and a minimum distribution to equity of $7.5 million occurs. The terms of the MIP could conceivably place a floor of value and limit the downside to about $0.08 (which happens to be the lowest price at which the stock has traded on a post-petition basis). I estimate that the funds available for distribution to equity after the §363 sale of substantially all of the company’s assets will be near $17 million or $0.18 on a per share basis.
EXECUTIVE SUMMARY
MiddleBrook Pharmaceuticals, Inc. is pharmaceutical company that sought protection from creditors under Chapter 11 of the Bankruptcy Code on April 30, 2010. On the filing date, the Company had no secured creditors and owed as much as approximately $16.8 million to its unsecured creditors. However, a large portion of the unsecured claims belong to Par Pharmaceutical, Inc. which has asserted a claim of approximately $11.6 million stemming from an unfulfilled development agreement. The official equity committee has indicated in court filings that it expects the claims of Par Pharmaceuticals to be disallowed in their entirety. When backing out Par's claim, the total unsecured claims are reduced to $5.2 million.
On May 11, 2010, the office of the United States Trustee (the "UST") appointed the Creditors Committee.
On June 9, 2010, the Court entered an order approving the sale of substantially all of the assets of the Company in a §363 sale to Victory Pharma who will serve as the stalking horse bidder. The stalking horse bid includes cash of $17.1 million, plus the assumption of about $750,000 in liabilities, according to court records. Competing bids are due on July 15, 2010. According to court filings, the Company is still in discussions with other interested purchasers.
On June 23, 2010 the Trustee appointed the Official Equity Committee.
Explanation of Value Revision
In my original summary I had estimated the distribution to equity would be about $0.09 per share. Admittedly, there is a wide variance between my current estimated recovery of $0.18 and the previous estimate. Originally, I based my valuation on the account balances reflected in the Monthly Operating Report (MOR) from May 2010. Upon further review of the court docket, the Debtors released their Schedule of Assets and Liabilities on June 1, 2010. This schedule excludes many accrued liability accounts that are reported on the MOR.
Given that the §363 sale appears to be moving forward and that end result appears imminent, the estate’s valuation is most appropriately viewed as a liquidating Chapter 11. As such, many of the accrued liabilities from the MOR are not truly items that have to be paid in cash or at all because the company will no longer be a going concern. My best estimate of what remains of the estate after the §363 sale will be a shell company with about $17 million in distributable cash & equivalents after satisfying all unsecured and administrative claims. The shell will also have an NOL carry-forward of $236 million. Given the uncertainty surrounding whether the estate could ever make use of or otherwise monetize the remaining NOLs, the $0.18 estimated recovery does not include any NOL value.
CATALYSTS AND RISKS
The biggest catalysts for recovery in this case include (1) higher bids emerging to compete with the stalking horse bidder, Victory Pharma; (2) an equity infusion to refinance the company as a standalone enterprise or (3) some other form of M&A transaction that seeks to preserve the enormous remaining net operating losses (NOLs). With the current market price for a share of stock of MiddleBrook Pharmaceuticals trading at $0.112 and a projected distribution of $0.183, it would appear that there may be more than 60% upside from current trading levels. In measuring the downside, I look to several issues that are discussed in more detail later in the report. Just briefly, with the proposed Management Incentive Plan (MIP) structured to begin paying out only upon payment in full to creditors and a residual value to equity of $7.5 million, it would appear that the downside could conceivably be measured at a per share distribution of $0.086.
The risks inherent in this case include the uncertainty surrounding liabilities that may potentially be owed to certain holders of MiddleBrook common stock who entered into Registration Rights Agreements in connection with a private placement of MiddleBrook stock during 2005 through 2008. Although the risk remains that the unsecured claims of PAR Pharmaceuticals totaling in excess of $11 million may be allowed, based on statements made in court filings it is expected that these claims that are currently reflected on the company’s books, will be disallowed in whole. If some or all of these claims are allowed, it could have a materially adverse impact on the distribution to holders of MiddleBrook common stock.
DISCLAIMER
The content provided herein is for informational and educational purposes only. In formulating this summary, the author had to make a number of assumptions and estimations. Because of the many uncertainties of the case, including the amount of claims that will survive the claims vetting process and the actual value of the final Asset Purchase Agreement, approximating the final distribution to equity holders is difficult if not altogether premature. None of the contents of this document should be construed as an offer or recommendation to buy or sell any security. The readers of this document should perform their own due diligence before taking any action and are encouraged to contact a financial advisor before making any investment decisions. This summary does not purport, and should not be construed, to advocate, solicit, encourage or discourage votes for any potential plan of reorganization for the Company. In full disclosure, the author is long MBRKQ common stock.
http://www.scribd.com/doc/33888674
MBRKQ MiddleBrook Pharmaceuticals Case Summary 06.30.10
http://www.scribd.com/doc/33766011/MBRKQ-MiddleBrook-Pharmaceuticals-Case-Summary-06-30-10
MBRKQ MiddleBrook Pharmaceuticals Case Summary 06.30.10
http://www.scribd.com/doc/33766011/MBRKQ-MiddleBrook-Pharmaceuticals-Case-Summary-06-30-10
MTRMP - Notice of Hearing Cancellation
Looks like a long-awaited settlement has been reached between the debtors and creditors in the Metromedia International Group chapter 11 case. Language in the hearing cancellation indicates that an amended POR will be filed to reflect the settlement terms.
http://migpreferred.blogspot.com/2010/06/mtrmp-notice-of-hearing-cancellation.html
That's one inference that could be drawn. Another that might be drawn is that with the equity and debt selling off in tandem, then it might be inferred that the EPA is back at the negotiating table trying to extract more money out of the estate. I guess $115 million, 88% of the litigation proceeds and a TiO2 plant are simply not enough to provide the EPA with enough comfort. This is all just bald speculation but perhaps more disclosure might obviate the need for speculation.
Given all of the recent motions being filed under seal, in addition to the rule 2004 examination request by the EC (and numerous objections thereto) it might suggest that maybe full disclosure to all parties in interest is not as consensual as advertised. The unwillingness by the cramming down parties (Debtors, Creditors and the EPA) to disclose information to the party being crammed down does tend to make the mind wonder just what do they all have to hide? On some of these filings we don't even get to see who the filing party is much less what is being objected to due to the protective order.
Here's the reorganization formula to achieve the greatest possible returns for the parties who are in a position to drive this result:
Suppress information, suppress value, suppress recovery, delever, emerge, expose value, then relever.
One correction, I said 180 days for the exclusivity limit and meant 18 months.
Only if you are a bondholder do you get to participate in the rights offering that conveys 70% of the reorganized equity. Under the current PSA, the current equity holders will receive no distribution and will not be invited to participate in the rights offering. Don't be confused by the term "Equity Commitment Agreement" as it only relates to the bondholders who are to become the new equity holders in reorganized Tronox. For those of us who go looking for a silver lining, the following language can be found prominently buried in a footnote within the PSA:
"Notwithstanding anything in the Term Sheet, the Parties agree that they will meet with the Equity Committee to discuss potential recovery to the existing equity holders. The Debtors and any other Party may discuss proposals with respect to, and engage in negotiations regarding, such recovery with the Equity Committee and the other Parties; provided, however, that the consent of all Parties shall be required before any such recovery is provided for under a plan."
Also, on March 1, 2010, the Company made the following statements within its motion to extend exclusivity out to the statutory maximum 180 days (July 12, 2010):
“Throughout these chapter 11 cases, Tronox has focused on maximizing value for all stakeholders. Early in these chapter 11 cases, Tronox, in accordance with the requirements of its DIP facility, entered into an agreement to sell substantially all of its assets to affiliates of Huntsman Corporation (“Huntsman”) and obtained approval for a competitive auction process. Always cognizant of the desires of its stakeholders to explore a standalone plan and its duty to maximize value, Tronox negotiated flexibility into the asset purchase agreement with Huntsman to engage in a dual path process of either selling its assets or consummating a standalone plan of reorganization. Since this Court’s December 10, 2009 order extending Tronox’s Exclusive Periods to March 15, 2010 and May 14, 2010, respectively, and as a result of herculean efforts, Tronox and its key creditor constituencies reached an agreement on the framework and substance of a plan of reorganization, thereby eliminating the need for an auction. Consequently, Tronox cancelled its scheduled auction and, since that time, has focused on negotiating and documenting a standalone plan of reorganization.
The negotiation and documentation of the standalone plan is complex. Tronox must make sure numerous creditor constituencies with disparate rights and views are comfortable with the plan, which takes careful consideration and time. In addition, Tronox is working hard to attempt to achieve a fully consensual plan by brokering a settlement between Tronox’s equity committee and creditor constituencies. Based on the progress Tronox has made to date and the momentum it has generated towards constructing a standalone plan, ample cause exists to extend the Exclusive Periods for a fourth time to enable Tronox to bring these chapter 11 cases to a successful end.”
“…In addition, Tronox has engaged in extensive discussions with the Equity Committee in an effort to incorporate the Equity Committee into the existing plan framework, including scheduling and participating in meetings with the Equity Committee on January 20, 2010 and with the Equity Committee, the Creditors’ Committee and the ad hoc bondholder group on February 24, 2010. Tronox intends to continue these negotiating efforts in hopes of presenting this Court with a fully consensual plan of reorganization before confirmation, if such a plan is possible.”
“Here, ample cause exists to extend Tronox’s Exclusive Periods. Tronox’s efforts and foresight while negotiating the asset purchase agreement with Huntsman have placed these chapter 11 cases on a track to the successful consummation of a standalone plan. Now, Tronox is focused on negotiating and drafting the necessary documentation for that plan, as well as trying to bring the Equity Committee into the deal and obtain its support for the plan. Tronox has earned the right to continue to captain the ship to confirmation without interference or distraction from any competing plans.”
“…With that goal in mind, Tronox remains committed to including the Equity Committee in the plan of reorganization, if a deal with the Equity Committee is feasible, and, in that regard, Tronox has met with the Equity Committee in an effort to reach full consensus on that plan...”
It's outlined in the Plan Support Agreement filed with the SEC on 12/24/2009.
Summarized Version (EX-99.1)
http://www.sec.gov/Archives/edgar/data/1328910/000095012309073382/d70534exv99w1.htm
Full Version
http://www.sec.gov/Archives/edgar/data/1328910/000095012309073382/d70534exv10w1.htm
If it applies to you, then you should read both. There is different treatment for accredited vs. non-accredited and unsecured claims below a certain threshhold can elect to receive payment in cash.
I think some people pay too much attention to the percentage of the company that is or is not in bankruptcy. It really doesn't matter if 95% or only 5% of the company is in bankruptcy as far as what happens to the equity holders. If you hold stock in the holding company and the final plan does not provide for a recovery for equity holders then that is the end of it.
How the value of the estate is derived will depend on whether it is a chapter 7, liquidating chapter 11 or a reorganizing chapter 11. In the liquidation proceedings the value distributed to the remaining constituencies will be a result of the sale of assets in the marketplace. If anything is left over after paying all creditors and administrative claims, then equity gets the rest.
In a reorganizaton proceeding, the value of the enterprise might be some agreed upon blend of recent financial performance and future projected financial performance and/or a discounted cash flow analysis. In a reorganization, you can almost always throw historical book values and current balance sheet composition out the window in determining value. The earnings potential of the reorganized company is what rules the day. Typically EBITDA or EBITDAR are multiplied by some multiple that is derived from several factors including but not limited to comparable companies analysis and the debt/EBITDA ratio. After you determine the enterprise value (EV), you deduct the value of all claims and add back distributable cash to arrive at the amount that remains to distribute to equity.
See the link below:
http://www.kccllc.net/documents/0910156/0910156100625000000000005.pdf
Bankruptcy Judge Scolds Latham Attorney Over Disclosure Of Fee
http://blogs.forbes.com/docket/2010/06/25/bankruptcy-judge-scolds-latham-attorney-over-disclosure-of-fee/
Tronox Agrees to Comply with FRBP §2015.3(a) and Make Required Disclosures
http://tronoxequity.blogspot.com/2010/06/tronox-agrees-to-comply-with-frbp.html
OSV, Look at the recommended reading list at the following link:
http://www.distressed-debt-investing.com/2009/06/distressed-debt-reading-list.html
Distress Investing, from what I can tell so far, is written more from an academic perspective and I agree that it does slow the pace of the book down quite a bit. I like it so far and think it will be very beneficial.
Another book I just finished that you may be interested in is "You Can Be A Stock Market Genius." The book was written by Joel Greenblatt of Gotham Capital. It is very fast paced and touches on a number of investing ideas including distressed, special situation, arbitrage, Spinoffs and other restructuring efforts. It walks through some short case studies on each investing area taken from Greenblatt's investing successes and also some less than successful investments. You won't read it and instantly become a guru investor but it gives you just enough to leave you wanting to learn more and arms you with enough information to be ready to learn more.
I used $5 million as an estimated D & A expense to arrive at $14.3 million monthly EBITDA and a $170+ run rate EBITDA. However, it was pointed out to me by a really brilliant chap that the D & A might have actually been $7.9 million due to decreased in PP&E and other LTA's which would put the run-rate EBITDA at $206 million.
Absent any discussion of writedowns or non-core sales of assets or some other reason for the decrease in PP&E and other Long-Term Assets it might appear that the decrease was due to a more advanced depreciation rate. The decline in the other Long-Term Assets account was a bit more steep this month.
Started reading “Distress Investing: Principles and Technique” by Martin Whitman & Fernando Diz. I found a quote in chapter 2 that I liked and wanted to share. It concerns the idea of Efficient Market Hypothesis (EMH) and whether or not it applies to bankruptcy and distress investing.
“Characteristic 1: Market Participant
Insofar as the market participant is unsophisticated about value analysis, financed with borrowed money, and lacks inside information, that participant will face a market tending strongly to instantaneous, EMH-like efficiency. Insofar as an investor is well trained, well informed, and not influenced by day-to-day or short-run price fluctuations, that investor avoids being subject to an EMH like efficiency.”
I have received a number of requests to share my thoughts on the POR, so here goes…
Here is my attempt to value the effects of the first iteration of Chemtura’s plan of reorganization. Assume you have 100,000 shares of CEMJQ and there are 243 million outstanding, you own approximately .0004 of the current o/s. Current CEMJQ holders get 5% of Newco which will have 100,000,000 shares. So .0004 x .05 x 100,000,000 is approx 2,000 shares in Newco. This works out to approx 98% dilution. The midpoint estimate of the Newco equity value is $1.354 billion as disclosed in Schedule F of the Disclosure Statement so the Newco shares are assumed to be worth $13.54 per share. Applying a 98% dilutive effect would yield a value to current CEMJQ of $0.27 before the additional dilutive effect from the Management Incentive Plan (MIP). However, there are additional dilutive effects of failing to participate in the rights offering. Theoretically, if you do not participate in the rights offering, your relative ownership of the Newco will decrease but how much will depend on the subscription rate. I am not certain if participation in the rights offering is limited to accredited investors.
I would like to get my arms around the additional dilutive effects of the MIP and failing to participate in the rights offering but I believe these will be based on future events (actual financial performance under the MIP & subscription price and rate from the rights offering) so it is difficult to nail down the exact dilutive effect of these events right now.
This is all IMO. I encourage everyone to read the disclosure statement and plan of reorganization in their entirety before making any investment decisions. Based on the entry points of SVP and Canyon, I have to believe that they will not be particularly thrilled with this POR. Judging from their comments in their court filing last Friday and the additional information released in today’s Debtwire article, it would appear that if the EC is not happy with this POR then they will try to convince the Debtor to incorporate portions of the EC’s own plan or in the alternative they may motion the court to terminate exclusivity and put forth their own plan.
Distressed Debt Investing Interview with Greenstone Fund
http://www.distressed-debt-investing.com/
Hunter over at the Distressed Debt Investing Blog has posted an interview with Chris White and Tim Stobaugh of Greenstone Fund. I have pulled a portion of that interview where Greenstone indicates that they see the equity of Tronox as a compelling opportunity that the market has mispriced.
"Tronox Inc. (TRXAQ and TRXBQ)
I should probably first say that we own both the debt and the equity in Tronox. However, given the industry bottoming after a 2 ½ year trough market in TiO2, the restocking of inventories, and recent price increases, we think Tronox’s MORs will improve going into the seasonally strong Q2 and Q3. Therefore, there probably is greater upside/downside for the equity right now than at any time in this process.
The reason we think the market is wrong about this company is the bankruptcy process risk and disclosure. We recently sent a letter to the Judge in the case regarding Tronox’s unfulfilled obligation to file periodic results of the operations of its Non-Debtor subsidiaries, as required under §2015.3(a) of the Federal Rules of Bankruptcy Procedure. There are 18 wholly owned non-debtor subs, and an undivided 50% interest in the assets of four non-debtor entities comprising a joint venture in Australia. It really seems to us that the debtors have dragged their feet exceptionally well on this issue, as we’ve seen no operational disclosure for these entities since the case started 19 months ago. It would be very interesting to see where cash is accruing on the balance sheets of some of these non-debtor subsidiaries.
Even in spite of this game of “hide the ball” on behalf of the debtor, if we annualize the most recent April MOR, we get $175mm in EBITDA, $58mm in free cash flow, and working capital north of $550mm. In Huntsman’s stalking horse bid from last year, they only requested $300mm in working capital; one would assume that number was aggressive given that they were not bidding against anyone else. Just applying a 5X multiple on EBITDA, which we don’t think is aggressive, and adding the $250mm in excess working capital, we get a $1.125bn enterprise value. After subtracting liabilities of $436mm, post petition debt of $423mm, and environmental obligations of $122mm, you get roughly $3.42 in potential equity value. This analysis doesn’t give any value to the non-debtor subsidiaries or their Australian joint venture, and it still yields upside potential of 5-7X current market price."
WSJ - Tronox Lenders Extend Deadline On $425M Bankruptcy Loan
By Eric Morath Of DOW JONES DAILY BANKRUPTCY REVIEW
Tronox Inc. (TRXAQ, TRXBQ) struck a deal with its lenders to extend a $425 million bankruptcy loan that will allow the chemical company to avoid facing a possible liquidation after acknowledging that it will miss a key June 24 loan deadline.
The extension, subject to court approval, would allow Tronox to continue to access the funding and give it until Sept. 24 to send a bankruptcy-exit plan to creditors for a vote, the company said in papers filed Tuesday with the U.S. Bankruptcy Court in Manhattan.
Tronox has said it will miss a June 24 deadline to obtain court approval of an outline of its Chapter 11 plan, which is required before the company can send its plan to creditors for a vote.
Without the amended loan, Tronox "would be unable to comply with the restructuring milestones" and could be forced to pay off the loan on an accelerated basis or "commence a process to sell its assets," the company said in court papers.
Tronox agreed to pay an unspecified amount of fees to its lenders, led by Goldman Sachs Group Inc. (GS), in exchange for the extended maturity date. In addition to an "arrangement fee," Tronox will pay a fee equal to 0.5% of the outstanding amount of the loan to each lender that consents to the amended loan terms.
A hearing on the matter is scheduled for June 24.
The loan was a key component to Tronox's decision late last year to abandon plans to sell itself and instead pursue a standalone reorganization. The loan, which repaid Tronox's pre-bankruptcy secured debt, will convert to exit financing after the company emerges from Chapter 11.
In addition to the financing, the company struck a deal for bondholders to backstop a $105 million equity-rights offering and reached an agreement with the U.S. government to settle claims for environmental liabilities.
Despite those deals, the Oklahoma City company said progress on a Chapter 11 plan that reaches a consensual agreement among all parties is moving slower than it expected.
The company said it has also so far failed to reach a binding deal with other government entities, including state and tribal jurisdictions, over environmental claims. The deadline to reach that agreement was June 30.
Tronox, which filed for bankruptcy protection in January 2009, produces titanium dioxide, a whitening pigment used in everything from paint to toothpaste.
The company was created in March 2006 when it was spun off from Kerr-McGee Corp., which was later acquired by Anadarko Petroleum Corp. (APC). Tronox took on a host of environmental liabilities in the deal, and blamed those costs for its bankruptcy filing.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)
-By Eric Morath; Dow Jones Daily Bankruptcy Review; 202-862-9279; eric.morath@dowjones.com
http://online.wsj.com/article/BT-CO-20100616-711160.html?mod=WSJ_latestheadlines
May MOR is out. Operations look better.
Operating Profit $3 million
Net income $2 million
EBITDA net of one-time charges $28 million
Looks to me like the EC is making a very strong statement. They are saying that whatever the Debtors propose to submit on June 17th will eventually have to be reconciled against the EC’s proposal if they are not one in the same. UBS does not often get involved on the equity side of Chapter 11 reorganizations; that is a fact that should not be lost on shareholders. In order to attach their name to the equity side and backstop a rights offering, they must be certain that their offering will be fully subscribed.
To reduce the debt to a level that “appropriately finances the Debtors' businesses” will satisfy the mandate to maximize value for all stakeholders. To fully equitize the entire capital structure at the expense of shareholders does not satisfy that mandate. From my perspective in following Judge Gerber, I am not only certain that he is smart enough and fair enough to recognize the difference but also certain that he will ultimately rule accordingly. If the equity committee has lined up participants who are willing to pay some creditors, in full and in cash, I don’t see how the court ignores that level of confidence, especially in the current credit environment.
Chemtura Equity Committee Reaffirms Intent to Pursue Maximum Recovery For Shareholders
http://chemturaresearch.blogspot.com/2010/06/chemtura-equity-committee-reaffirms.html
Congratulations! Thanks for keeping us posted.
I saw that one too. I am specifically interested in what Tronox's VP Robert Gibney is willing to say on the record about the performance of the company. I like today's article better because it appears to be Tronox specific. They have been a tight lipped bunch so I am all ears...
Road paint shortage leads Tronox to resurgence
Anyone have a subscription that could clue us in to what the rest of the article says?
http://journalrecord.com/2010/06/10/road-paint-shortage-leads-tronox-to-resurgence-general-news/
OKLAHOMA CITY – Tronox Inc. is enjoying a resurgence of titanium dioxide pigment demand as the company heads out of bankruptcy and the country faces a road striping paint shortage, Vice President Robert Gibney said. “It’s good to see the business performing well right at about the same time we’re getting ready to exit bankruptcy this ...
Tronox Equity Committee Motions for FRBP 2004 Examination
http://tronoxequity.blogspot.com/2010/06/tronoxs-equity-committee-motions-for.html
Here’s something to consider before getting all worked up about dilution. Ask yourself where the dilution is coming from and what are the proceeds of the dilution being used for. If the dilution is occurring for the purposes of reducing the debt then consider the balance sheet impact and the impact on the EBITDA multiple that may be assigned to the company afterwards. If you have a reorg situation in which the shareholders face little dilution then it is likely that the company emerges with the same debt load it had before unless it sold off assets to pay the debt or it got new funds from a rights offering, used the funds to pay the debt and issued preferred shares to the subscribers. In these situations you still have parties sitting above you in the priority scheme but your relative ownership of the common stock remains mostly intact. If the shareholders face large dilution for the purposes of large debt conversion then you end up owning less of the company but the debt load is smaller and the equity component is larger.
Simple equation: less dilution = larger slice of the equity pie of a company with a large debt load. More dilution = smaller slice of the pie but the slices are worth more than those of the debt laden company. A debt laden company cannot command an EBITDA multiple as high as one that is not as debt laden, all other things being equal. So for any given level of EBITDA the multiple assigned will be partially affected by its leverage.
Just realize that if someone tells you only what the dilution is and then proceeds to ask what the equity is worth then the proper response should be to look completely confused and start asking more questions because you do not have enough information to answer their question. You will need to know several data points which may include some combination of share structure, EBITDA projections, EBITDA multiple, Enterprise value, value assigned to equity based on discounted cash flows, total allowed claims, amount of valuation reserves set aside for unsettled claims, emergence debt level, working capital etc.
Still around and still holding large positions in Chemtura and Tronox. The price action in both is tied to macroeconomic concerns. Chemtura is largely held by funds. With the global markets rolling over there are margin calls coming into the world of funds. Many funds will seek the security of cash and this often creates buying opportunities for those with a longer term horizon. Credit spreads are widening between risk-free bonds and hi-yield debt. Credit is not flowing right now and that creates panic and fear in the markets. The positive thing for Chemtura is that the parties who would back a rights offering from the equity side made their bets long ago and are less likely to pull up stakes. The funds involved that represent the EC that proposed the rights offering in the first place are "over the wall" and cannot sell out so their bets are placed and they are entrenched and will be in this for the long haul.
The question is will the Debtors support the EC rights offering? My bet is that they will given that their posture has changed dramatically in the last few weeks. They have shifted from telling the court that they "don't see any equity recovery" to now issuing a press release saying that there may well be recovery for equity. That is a huge shift in sentiment for anyone who has been following this and paying attention. Just realize that what the company said about equity is about all they can say at this time. Until the disclosure statement and POR are released and the signatures of the funding sources are on the dotted line they will not be able to make any stronger statements about equity.
Just continue to watch the bonds as they are often the best arbiter of value.
We have omnibus hearings scheduled for June 1st, June 24th and June 30th. I would not be surprised if the June 1st hearing is cancelled altogether. Some of the items to be heard on June 1st have been moved to June 24th within the last few days. At the May 20th hearing Judge Gropper commented on the legal firepower in the room that gathered for what ended up being a 3 minute hearing for an uncontested matter. I believe his guidance was aimed at making sure that the hearings were more efficiently scheduled so that the estates assets are not needlessly wasted.
They aren't necessarily new, they have been active before. Here are some histories shown below. I have aggregated and rounded the TRXAQ and TRXBQ totals through the Month of April 2010. The 2009 figures are rounded annual totals of both buys and sells. I don't know the buy/sell ratio, just the totals.
MITR (2009) Traded 1,459,000 total shares
MITR (2010) Traded 548,000 total shares
CSTI (2009) Traded 453,000 total shares
CSTI (2010) Traded 24,000 total shares
These market makers represent institutional and higher net worth clients. Here is how MITR describes themselves:
"Founded in 1982, Miller Tabak + Co., LLC (MT) has long specialized in the discreet handling of stock and option purchases and sales with an emphasis on anonymity and a focus on detail."
Not that I am aware of. While we have had a 30+% price retracement in the last 5 days it is on very low volume. In that timeframe we have only seen about 1.5% of the total o/s turn over in the aggregate including both the "A's" and "B's". It is interesting that we are very near the level from which we gapped up on April 14, 2010 which was $0.90. This also happens to coincide with the 38% fibonacci retracement level. I Don't know if it means anything or not but it intrigues me.
The broad markets are rolling over hard right now and it is ugly all over. There are many big board stocks I follow that have been beaten up as bad or worse than Tronox. One of our competitiors, Huntsman (HUN), has retraced 35% or so in the last 6 weeks. One that has held up very well is Kronos (KRO) and they are our best "pure play" comparable. The fact that Kronos has been edging slightly higher while the rest of the market has tanked is a good sign for the TiO2 industry. We are very similar in size to Kronos but slightly less capacity without the Savannah and Germany facilities.
I agree on all counts.
There was an 8-k that Tronox issued in the last few days that indicated the company was changing auditors and would soon be looking to issue 2008 and 2009 10-k reports. I won't hold my breath until the release of those but it would be nice to see some real numbers that reflect the whole enterprise. I suspect that if Tronox's performance were to have more exposure then other investors would see what we see as far as potential back-end equity remaining.
It is up to our court appointed equity committee to make the case in the courtroom. I know a number of long-term investors are becoming weary while waiting for news and watching the price come down but let me offer some perspective on that. If the EC were banging their fists on the table and issuing all manner of court filings in opposition to the Debtors then that might signal a cause for concern. The fact that we see nothing of the sort is some indication that the EC is currently on board with what is going on.
In my experience, when an Equity Committee or an ad hoc committee of equity holders is making a lot of noise it typically indicates that they are not being involved in the process at a level that is to their liking or they do not like what they are hearing. In this case, we have no idea what the EC is thinking or doing. In a twisted sort of way, that gives me comfort. This is counter intuitive and requires more than just a few passing thoughts because the investing community typically despises and punishes uncertainty. Silence from our equity committee which is represented by sophisticated and experienced investors and attorneys is not necessarily a reason for despair it might be viewed as an indicator of their support of current direction of the case.
TRXAQ April 2010 MOR Spread
http://www.scribd.com/doc/31645698/Tronox-MOR-Spread-April-2010
Tronox April 2010 MOR Spread
http://www.scribd.com/doc/31645698/Tronox-MOR-Spread-April-2010
Tronox April 2010 MOR on PACER
For the month of April, $4.6 million in Net Income and $11.2 million in net oper. inc. Using $5 million as the D & A figure puts EBITDA near $16 million which would be $192 million annualized. Last 3 months annualized is roughly $175 million.
This, of course, does not include the non-debtor subs.