Bankrupt and Distressed (BAD) Research and Due Diligence

[Madclown]

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."