Tronox Inc. (TROX)

[persistentone]

This plan may be in trouble.

I came into this as a potential bondholder. I was reading through the 7/7/2010 draft Disclosure Statement for the reorg plan, and simultaneously building a model in a spreadsheet, to measure returns buying the bonds, given the new dilution, new debt structure, etc.

I guess it was bad enough that the United States has not accepted the environmental claim limit proposed by Tronox. You can read the details of that negotiation on pp 32-33 of the Disclosure Statement regarding the plan. I was pretty much spot on in my earlier post in guessing that they Tronox might need to pony up another $150M to cover the environmental claim:

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=51952594

Note that the government is trying to get Tronox to pay $295M. I'll admit I was lucky on that call, but it's annoying that the only responses I got said I was being negative and was trying to "scare people out of shares".

But the above are details, and we can calculate the effect of those, and we just need to pay a different price for the bonds. That's what the market did and they took the bonds down to 70% of par, then to 80% of par, and I think if the environmental claim were at $295M that is about right, given the new dilution and the way they are restructuring the debt.

That's when I got to page 25, and my jaw dropped. Class 4 are the tort claims. And page 25 documents that these claims are around $2 BILLION dollars. How, please tell me, are $2B of claims going to be satisfied by a 12% stake in the environmental claims lawsuit? Page 25 shows the environmental claims at $4.9B.

Even if Anadarko loses a lawsuit for $4.9B, the 12% share in that is around $590.7M.

Now consider what happens if Class 4 rejects the plan. Page 6 of the Disclosure Statement documents that if Class 4 rejects the plan then they are at that point rolled into the general unsecured claims (GUC). And $2B of unsecured tort claims would completely overwhelm the $470.6M of general unsecured claims documented on page 6, the current Class 3. If $2B of unsecured claims are allowed to enter the GUC pool, the bondholders end up with 14.7% of the company pre-dilution and the Class 4 tort holders end up with 81.3% pre-dilution. I calculated Class 4 would be around 59% of the new equity post-dilution (from the preferred stock, Tranche A/B warrants, equity warrants, management warrants, and 5% extra dilution thrown in for margin of error).

Give Tronox a 6.5 EBITDA multiple on $150M EBITDA, $300M for working capital adjustment, and I get to around $608M of equity value of which the Class 4 holders would get about $359M.

Now step up Tronox to an 11 EBITDA multiple on $170M, and $375M for working capital adjustment, and I calculate the Class 4 holders would recover $931M.

Now if you were a holder of those Class 4 tort claims, would you risk four years in court against Anadarko, with a very optimistic upside being that you take $590.7M (and I am not deducting from that the $100M+ in legal fees during those four years!) and your downside being that you get NOTHING? Your alternative is to reject the plan, and you very quickly get $359M to $931M. Your overall recovery improves. Your time to recovery improves. You quickly stop your losses to lawyer fees.

If $2B is the correct number for the size of Class 4 claims, the Class 4 holders will certainly reject the reorg plan. And at that point the bondholders are screwed.

The key here is what is the size of the Class 4 claim that will be used in calculating the ownership percentage of the GUC pool. Does someone have an insight into this? Page 25 says the filed claims are $2B but the Estimated amount is "unknown".

If Class 4 rejects the plan, how many more months do we spend in Chapter 11 arguing with those claim holders about their actual claim value?

None of this information appears to be in the price of the bonds. Am I missing something? If I'm even ballpark correct on these numbers, the bondholders are in deep deep trouble.