Tronox Inc. (TROX)

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From madclown: http://tronoxequity.blogspot.com/2010/08/debtwire-article-outlines-tronox-equity.html

Debtwire Article Outlines Tronox Equity Committee Plan Framework
According to a Debtwire article dated August 11, 2010:

Tronox share holders make rights offering backstop commitment for alternative POR

Story: Tronox’s official equity committee is putting money where its mouth is. The group has agreed to finance a USD 120m-USD 130m rights offering in support of an alternative POR that preserves share holder value, said three sources familiar with the matter.
The committee, led by Ahab Capital and RLR Capital, plans to present its agreement to the debtor by next week, setting the stage for a valuation battle with holders of Tronox’s USD 350m 9.5% unsecured notes due 2012.

The plot thickens at yet another pivotal point in the Titanium Dioxide producer’s Chapter 11 stay. Although the debtor maintains exclusivity though 13 September and has a POR on file with the court, none of the major case constituents – including bond holders, share holders and Tronox’s largest creditor, the EPA – are on board.

Plans from all sides

Tronox’s POR calls for the full equitization of the 9.5% notes and the extinguishment of common stock. Environmental creditors represented by the EPA would get USD 150m in cash, preferred stock, warrants, and interest in a litigation trust against Anadarko Petroleum. Anadarko is the owner of Tronox’s former parent, Kerr McGee, and is the defendent in a related fraudulent conveyance case.
By contrast, broad strokes of the share holder proposal would pay off the EPA with a USD 275m cash settlement of remediation claims, funded with the rights offering and company cash, the sources said. Meanwhile, note holders would get a par plus accrued recovery through equitization and the option to participate in the rights offering. Share holders would endure some dilution, but stay in the money.
Conceptually, the share holder alternative tracks a similar plan put forth by note holders last month but with two notable exceptions. That deal aims to give the EPA around USD 275m in cash, funded instead by a backstopped bond holder rights offering worth up to USD 125m. Share holders would then get wiped out under a lower valuation and bond holders would be fully
equitized, as reported previously.

“The EPA wants a cash recovery, so the question is who has the right to do a backstop: share holders who could be in the money, or bond holders?” said one of the sources. “Bond holders want to settle this quickly to preserve trading value of their note, but share holders have leverage --- they have little to lose challenging the legitimacy of the EPAs claims in discovery. The equity can drag out the question: Why should Tronox owe the EPA anything? Why doesn’t it all fall onto Kerr McGee/Anadarko?” Tronox’s 9.5% notes last traded at 90 on 5 August, up from 83 on 16 July, according to MarketAxess. The debtor’s common shares traded at USD 0.30 today for a USD 12.5m market cap.

Value gap

Setting aside the EPA and rights offering dramas, advancing a share holder friendly alternative also rests on the enterprise value exceeding the company’s USD 1.1bn claims pool, the sources said.

Tronox’s POR set a mid point EV of USD 1.06bn based on USD 190m of 2010 EBITDA, implying a 5.5x multiple. Shareholders are planning to assert Tronox will generate around USD 220m-USD 250m of EBITDA over the next two years on the back of improving TiO2 industry fundamentals, the closure of unprofitable plants and the expansion this year of its Australian footprint, the sources said.

Assuming the USD 220m of EBITDA and a higher 6x multiple – a full turn discount to the 7x trading multiple on publicly traded competitors Huntsman and Rockwood Holdings – gets to a USD 1.32bn EV. That would preserve around USD 220m of value for shareholders, a premium to today’s USD 12.5m market cap.

Making a counterpoint, one bond holder dismissed the equity scenario as too aggressive considering Tronox lacks the diverse product offering of higher multiple competitors and averaged USD 190m of EBITDA in the three years before it filed for bankruptcy in 2009.
Calls to Ahab Capital, RLR Capital, equity committee legal counsel Pillsbury Winthrop and financial advisor Eureka Capital were not returned. Calls to officials with debtor counsel Kirkland & Ellis were also not returned.

www.debtwire.com

by Andrew Ragsly

Source: Debtwire, Court document(s)
Intel. Grade: Strong evidence
Intelligence
ID: 1023671