Chemtura Corp (fka CHMT)

[My4ntoy]

New posting by Madclown on http://chemturaresearch.blogspot.com/.


Thoughts on the Chemtura Plan and Disclosure Statement
I have maintained this “unsophisticated” blogsite for almost 12 months now and have largely used it as an information aggregation site and have tried to take arcane and difficult to find information and put it all in one place and present it in a form that is easy enough to understand. Occasionally I would add some opinion here and there and my bent when doing so was always towards equity because I was an equity holder and this was designed to be a site maintained by the equity holder for the equity holder. In fact, the original idea was to aggregate this information for myself to reference on a daily basis and to use it as a resource down the road. After awhile, I thought it might help others so I posted it publicly and the response has been tremendous. I never could have imagined the traffic and the types of visitors this site has generated.

With that said, after reading the Debtor’s plan, and reading the recent court transcripts and Debtwire articles that shed some light on the framework for an Equity Committee proposed plan of reorganization and also reading the reaction of equity holders, I felt I had to break from tradition and call it as down the middle as I possibly can.

The first iteration of the Chemtura Disclosure Statement and Plan of Reorganization provides for 98% dilution to CEMJQ holders and values a share of CEMJQ at $0.27 before the dilutive effect of the key employee incentive plan. The 98% dilution is the result of the aggregate shareholders of CEMJQ owning 5% of the new company, which is 5 million shares out of the 100 million that will be issued but you have to remember that you are also dropping from 243 million shares down to 100 million so your relative ownership of the new company and the old company is not in a 1:1 ratio it is a 1 to 2.43 ratio. By way of example, if you owned 100,000 shares of CEMJQ you own 100,000/243,000,000 or 0.041% of the current outstanding shares. Now multiply .041% or .00041 times 5,000,000 and you get roughly 2,058 shares of the new company. You originally owned 100,000 shares, now you have 2,058 shares. This results in a dilution of 97.94%. In a simpler calculation simply calculate 5/243 for the dilution rate.

If Lazard’s estimated value of $13.54 for a share of the Newco stock is in line with market prices on a post-emergence basis, then the value of those 100,000 shares in one's account should be $27,865 (13.54*2058). Right now the market is placing a value of $64,000 on those 100,000 shares of CEMJQ. In fact, at $0.64, the market is pricing in a scenario in which the equity committee submits a better plan that returns more value to equity holders. Market participants are effectively willing to "pay up" over and above the value that the current plan provides in order to get ahead of that trade. The likelihood is that a better plan will be put forth eventually but whether the Debtors and Creditors Committee agree to it is an entirely different discussion. Whether the Creditors Committee can or will try to avoid being paid “in full” and in cash will be a battle left for the courtroom but it does strike me as odd that the creditors committee would be so averse to being made whole with cash. Oh sure, with their mouth they say they “look forward to it” but with their actions they are saying something completely different. They should be embracing the payment, in full, in cash, that the equity committee purports to be offering but oddly enough the creditors seem to want to avoid such an outcome. This tells me there is back-end value worth fighting for. The uncertainty over who ultimately gets to claim that value would be one reason why the price hovers above its worst case scenario value and below the value that a more favorable plan might offer.

The framework for an equity committee plan as briefly outlined in Debtwire and in court transcripts would include cash payments to creditors of $1.85 billion in full satisfaction of their claims. This amount would be backstopped by UBS in an amount of $1.35 billion with an additional $500 to $600 million being provided by the equity committee members at $250 million and the balance provided by other large market participants that have supposedly provided “highly confident” letters. At this point, I am going to make the assumption that the $500 million to $600 million would be a preferred issuance open only to accredited investors and struck at a very attractive discount. And this is the point at which I potentially take issue with the institutional members of the equity committee; for if the infusion of new money is not open to all current equity holders then current CEMJQ holders who do not get to participate in the rights offering are still diluted over and above what the institutional members are. This would be the reason that the equity committee needs to pay off all creditors in full; because if they do not do so, the creditors who were equitized would not sit still and allow themselves to be diluted and trumped in the priority scheme by constituencies they enjoyed priority standing over on a pre-emergence basis.

While I recognize that the framework for an alternative plan as outlined by the equity committee in Debtwire and in the courtroom would return considerably more value to all CEMJQ holders, I still would like to take the opportunity to propose that at least some portion of the equity committee’s rights offering might be open to current CEMJQ holders who are not accredited investors. The formation of the equity committee required both institutional and retail shareholders. Initially the push was made by a few scattered retail investors who had the foresight and the diligence to wage the battle for many months without any institutional assistance and then the ad hoc group came in and took it to levels it would not have otherwise achieved. While the original ad hoc group of equity holders might have advanced the agenda this far without an official committee, it would have been on their own dime, as opposed to being subsidized by the estate. And those of us who paved the way know that the U.S. Trustee would never have appointed an official committee comprised of only institutional investors. The convenience and the safety net that was provided to the ad hoc members in having an official committee certainly bolstered their position and allowed them to get this far without having to “Show the money.” Just something for them to think about.

In looking at the Debtor’s plan of reorganization and disclosure statement, surprisingly, it provides a very fair estimation of enterprise value. While I am not in favor of the distribution schedule and treatment of equity holders under the Debtor’s plan, the enterprise value seems fair and is in line with industry multiples and the Debtor’s own Key Employee Incentive Plan. The midpoint EV is struck at $2.05 billion which works out to EBITDA of $315 million and an EV/EBITDA multiple of 6.5 times. Both seem quite fair in the face of the not-so-favorable Monthly Operating Reports we have seen in 2010, only one of which would project out on pace to match the $315 million in EBITDA. The 6.5 EV/EBITDA multiple is in line with the 2010E and 2011E EBITDA outlook for other specialty chemical companies. Where the balance seems fairly struck is that the bad MOR numbers came at a point in the earnings cycle when Chemtura’s EBITDA is seasonably low and the natural tendency of the creditors and debtors is often to lowball the EV and suppress valuation. I suspect they knew there were too many people with deep pockets watching to try and pull any of the typical shenanigans. They also know that Judge Gerber cannot be hoodwinked. While the EV could have been struck at a higher level, under the Debtors plan there is clear upside on a post emergence basis, but not so much that would cause an expensive valuation fight prior to confirmation.

In looking at EV of $2.05 billion plus an additional $200 million in projected cash balances, this yields a distributable value of about $2.25 billion as outlined in Schedule F of the Disclosure statement. To avoid a protracted valuation fight, I assume that the equity committee will work within the EV constraints provided by the Debtors. This will eliminate any attempts of the Debtors or creditors committee to raise untenable valuation concerns if it is their own numbers that have been used. Insomuch as the equity committee has described the outline of their plan publicly, it would appear that all claims are satisfied at $1.85 billion so in a best case scenario it seems there could be as much as $400 million in value to flow through to CEMJQ holders.

There appears to still be a gap in the view of the world that the various constituencies have concerning the company’s ability to service the debt at various debt/EBITDA levels. Under the Debtor’s plan the Debt/EBITDA ratios based on 2010E and 2011E EBITDA would be approximately 2.4 and 1.9 respectively, which are on the lower end of industry comps. Under the equity committee’s idea of a properly financed balance sheet these levels would be 4.3 and 3.4 respectively, which is comparable and in-line with other similarly situated differentiated chemical companies like Celanese, Huntsman and Solutia. Given these debt/EBITDA comps it will be up to the equity committee to secure the financing they claim to have secured and then successfully make the argument that their proposal properly finances the company’s balance sheet while providing the best possible recovery for all constituencies.
Posted by Rodney McFadden at 12:55 AM

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