Next GGWPQ? Tronox Equity at $0.38...Plan Value of $2.50

[Josh4580]

TRXAQ.PK & TRXBQ.PK

 

Debtors Plan filed 9/1:  http://www.kccllc.net/documents/0910156/0910156100901000000000003.pdf

Equity Plan filed 9/2: http://www.kccllc.net/documents/0910156/0910156100902000000000004.pdf

 

Titanium Dioxide Industry Overview Provided by Huntsman at Annual Investor Day (slides 96-112)

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDU1ODJ8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

 

Tronox has an approximate 9% share of the global titanium dioxide market with an annual global production capacity of 425,000 metric tonnes.

 

Kronos 10-K: We believe that our annual attainable production capacity for 2010 is approximately 532,000 metric tons and we currently expect we

will operate at approximately 90% to 95% of our attainable capacity

 

Classic Valuation Fight in competing plans.

Debtors plan calls for a $975 million- $1150 million EV

Equity Plan calls for a $1200 million- $1300 million EV

 

Kronos has only a 25% higher production capacity than Tronox and currently trades for an EV of $2.21 billion.  Both companies derive 90% of their sales from Ti02 sales.    http://finance.yahoo.com/q/ks?s=KRO+Key+Statistics

 

80% of KRO EV of $2.21 billion gives us a comp valuation for Tronox of $1.77 billion.  This shows that the Equity plan is much more realistic than the Debtors plan.

 

MOST IMPORTANT PART OF THESIS

The Judge presiding over the case is the Honorable Judge Alan Gropper.  This is the same judge that presided over the General Growth Properties case in which Bill Ackman turned his $50 million investment in the pre-petition equity into over $1.5 billion!  Alan Gropper is very focused on being fair across all creditor and equity classes and stresses the need to reach a consensual agreement.  

 

TRXAQ & TRXBQ both have identical rights and this issue is addressed in the company’s IR FAQ here: http://tronox.com/ir/faq_ir.htm

 

TRXBQ currently trades at a discount at $0.38 compared to TRXAQ at $0.43 so it is a much better bargain.  

 

Most likely the Equity Committee plan will be the one accepted as it is the closest one to the correct valuation reality and given Judge Alan Groppers history of being pro pre-petition equity.

 

Plan Valuation Ranges: $1.2 billion $1.25 billion $1.3 billion

Estimated Recovery for Equity Stock: $1.39 $2.58 $3.75 per share

 

TRXBQ is a potential 4-10 bagger is a very short time frame.

 

Upcoming Court Calendar

September 16, 2010

Hearing on approval of plan support and equity commitment

agreements

U.S. Bankruptcy Court for the Southern District of New York

Case # 09-10156

 

September 23, 2010

Hearing on approval of company, equity committee disclosure

statements

U.S. Bankruptcy Court for the Southern District of New York

Case # 09-10156

 

Disclosure: I own shares in TRXBQ

[manualofideas]

Very interesting idea, thanks!  Just so we can assess the downside, could you tell us the equity values of the EV range in the debtors' plan is used.  Thanks.

[rick_v]

Love this idea! Will be buying some this week.

[QLEAP]

Looks like a leap of faith to me :)

 

Btw I had briefly looked into this earlier (when it was 0.68 or so), here's a good resource - http://tronoxequity.blogspot.com

 

Hope it helps

[Josh4580]

manuelofideas,

 

The Debtor's Plan basically puts the equity completely out of the money and awards them with a token of warrants.

 

The New Warrants will be convertible into 5% of the New Common Stock to be issued on the Effective Date based on a total

enterprise value for Reorganized Tronox of $1.5 billion.  You can use Black-Scholes to figure out the value of these warrants using the KRO implied EV of $1.77 billion and a 2-year term.  The Debtors plan puts the recovery at a meager $1-$4 million which seems to be based on their EV analysis of $975-$1150 million.  I view this outcome as highly unlikely given the current market conditions and the very fair judge.  Additionaly, these warrants have much more value when you use a normal EV for Tronox but I have not yet calculated them. 

[finetrader]

In a bankruptcy event,

 

the creditors have to vote to adopt the plan of reorganization. I don't remember seeing a judge determining himself the plan to adopt. Don't think they have that power.

 

The equity holders usually have almost no say on the reorganization even if they get ripped off.

 

What I have seen is a big equity holder make an arrangement with a group of creditors (this group was getting more in the equity plan than the creditor's plan) so that they vote in favor of the equity plan. In the reorganization of Stelco, this had the effect of forcing the creditors to negociate with the equity holders.

[rmitz]

This is going into my "too hard" pile for the moment.  I'm going to need a good number of hours to read up on everything and I don't think I'll have that kind of time soon.  My gut feeling is that it would be safer to look at the bonds as an investment, but I don't know about those returns.

[twacowfca]

This is going into my "too hard" pile for the moment.  I'm going to need a good number of hours to read up on everything and I don't think I'll have that kind of time soon.  My gut feeling is that it would be safer to look at the bonds as an investment, but I don't know about those returns.

 

I'm not familiar with the details of this case, but the outline presented does not look favorable.  I think Gen Growth was a one off situation, a complicated case with lots of compartmentalized properties and no unified class of creditors with a common agenda.  When the creditors have common cause, they generally control the outcome.

[Josh4580]

Tronox Equity Committee Seeks Court Approval for $185 Million Backstopped Equity Commitment Agreement

 

http://tronoxequity.blogspot.com/2010/09/tronox-equity-committee-seeks-court.html

 

TRXBQ up 31%, TRXAQ up 37% this morning

[rick_v]

Yes Josh this is a good play, thanks again we built a tiny position.

[twacowfca]

manuelofideas,

 

The Debtor's Plan basically puts the equity completely out of the money and awards them with a token of warrants.

 

The New Warrants will be convertible into 5% of the New Common Stock to be issued on the Effective Date based on a total

enterprise value for Reorganized Tronox of $1.5 billion.  You can use Black-Scholes to figure out the value of these warrants using the KRO implied EV of $1.77 billion and a 2-year term.  The Debtors plan puts the recovery at a meager $1-$4 million which seems to be based on their EV analysis of $975-$1150 million.  I view this outcome as highly unlikely given the current market conditions and the very fair judge.  Additionaly, these warrants have much more value when you use a normal EV for Tronox but I have not yet calculated them. 

 

 

The only similar case that comes to mind was Mirant.  The creditors squabbled among themselves, but all wanted the equity holders to get next to nothing.  Management supported the creditors, their soon to be controlling shareholders.  What saved something for the equity holders was evidence that the creditors had stacked the deck on their appraisal which was ,of course lower than the equity committee's appraisal.  The allegations of fraud, which the judge took seriously, threatened their plan, so they agreed to increase what the equity holders got from a small pittance to a large pittance.

[Myth465]

Yes Josh this is a good play, thanks again we built a tiny position.

 

I bought a tiny bit as well. It seems like a heads I win x 5 or tails I lose x 1. I figured what the hell.

[rick_v]

Myth if you build a portfolio of enough of these you will outperform the market over time. That has been my personal experience!

 

 

[Myth465]

Myth if you build a portfolio of enough of these you will outperform the market over time. That has been my personal experience!

 

I agree. I wish I had more time for research. Everything is moving this week, and looks like we are on to a mini rally. Garmin looks like its working out. I want a slightly bigger margin but will be watching it.

 

I sold alot of stuff that would have done 10% - 15% yearly because I want some capital for more ideas like this, Garmin, Heeleys, WDC, ATSG, FBK (been a bit of a dog but hopefully it works out).

[PlanMaestro]

TRXAQ: Debtors still have exclusivity and their offer basically wipes out equity. Contrary to GGP, there is no alignment of interest between debtors, that want to reduce the debt, and equity.

 

For those of you looking for a explosive Q with downside protection, you might want to check MMPIQ. It is very illiquid and small for a fund. However,

 

• The exclusivity period was ended for some selected parties
  
• Debtors settled already two thirds of their secured lending
  
• There are three PORs all of them giving return to equity at valuations higher than the current market price.
  

 

And actually the debtors POR gives full recovery to equity. MMPIQ has substantial land in downtown Los Angeles for residential use and cash flow positive industrial properties (less than 5% excess capacity in LA according to several real estate consultants) that are financing the residential development keeping the cash burnt low.  

 

Every way I cut it, the liquidation value should be at least $90M. The OEC is playing hard to get so it has not supported any of the PORs yet. The problem is that all parties involved, non settling secured creditors and minority shareholders, want Richard Meruelo out but he controls with John Maddux more than 50% of the shares. And that is the fight.

 

Some risks: American Apparel is a large tenant, no clear CEO for the reorganized company (R. Meruelo has not been the best), R. Meruelo has been playing hardball through out the whole process.

 

Market Cap: $15M

Equity: $155M ($340 pre- recent write-offs)

 

http://variantperceptions.wordpress.com/2010/03/04/meruelo-maddux-properties-a-cautionary-tale/

http://www.sec.gov/Archives/edgar/data/1375083/000137508310000014/form10k.htm

http://investorshub.advfn.com/boards/board.aspx?board_id=15242

[premfan]

Hey plan, i read your thesis on premier exhibition back in the day and decided to invest in the situation.  I cant imagine a downside worse than 3 dollars a share. Whats your take on the current situation?

[PlanMaestro]

Premfan, ask me in the blog and I'll answer (actually I posted about it recently). I do not want to clutter the board with a completely unrelated subject.

[Josh4580]

Tronox Wins Court Approval of Plan Support Agreement (Update1)

2010-09-17 16:42:05.670 GMT

 

 

    (Updates with judge’s name in second paragraph.)

 

By Tiffany Kary

    Sept. 17 (Bloomberg) -- Tronox Inc. won court approval of an agreement to pay bondholders to back an offer of new stock in a reorganized company, after an adviser to the company said delays could jeopardize Tronox’s environmental settlements.

    U.S. Bankruptcy Judge Allan Gropper in New York today approved Tronox’s revised agreement to pay bondholders an 8 percent fee to back a $185 million rights offering of common stock in the new company.  The offer was revised from an initial $170 million after a rival group of investors offered to back a

$185 million under Tronox’s plan, or one put forward by its equity holders.

    “We are not locking anyone into a particular plan,”

Gropper said, noting that fees for the bondholders are “market rate,” and that Tronox can still consider a rival reorganization plan from its equity committee. A hearing on the terms of Tronox’s Chapter 11 plan is set for Sept. 23.

    Todd Snyder, managing director of Rothschild, a financial adviser to Tronox, testified today that an environmental settlement that forms the cornerstone of Tronox’s reorganization could fall apart if the company was to go with a rival offer that changes its allocations to creditors.

    “If the stopper is not put in the bottle, the government will do what it has always says it will do: if it sees an opportunity to get more cash value, it will try to get it,”

Snyder told Gropper, adding that the U.S. had asked him about the revised agreement to back the stock offering.

 

                          Pick a Horse

 

    Tronox’s interim Chief Executive Dennis L. Wanlass also testified that the company could lose the trust of its business partners if it doesn’t get the commitment of current investors and show it can exit bankruptcy quickly.

    “I think it’s important we pick a horse and ride it,”

Wanlass said.

    Tronox filed an outline of a reorganization plan Sept. 1 that set aside $320 million to cover an estimated $1.4 billion to $5 billion in environmental claims, from the Environmental Protection Agency and other environmental agencies. Snyder said today that the U.S. considers the liability it has taken on by assuming responsibility for toxic sites “burdensome,” and will want as much money as it can get to deal with the unknown costs of cleanup.

    The bankruptcy case is Tronox Inc., 09-10156, U.S.

Bankruptcy Court, Southern District of New York (Manhattan).

 

For Related News and Information:

Top legal stories: TLAW <GO>

Bloomberg legal resources: BLAW <GO>

 

--Editors: John Pickering

 

To contact the reporter on this story:

Tiffany Kary in New York at +1-718-875-1459 or tkary@bloomberg.net.

 

To contact the editor responsible for this story:

David Rovella at +1-212-617-1092 or drovella@bloomberg.net.

 

[beerbaron]

I there any books available that could teach me how to evaluate Chapter 11 reorganization? Don't want to be a one legged man in an ass-kicking contest!

 

BeerBaron

[PlanMaestro]

I there any books available that could teach me how to evaluate Chapter 11 reorganization? Don't want to be a one legged man in an ass-kicking contest!

 

BeerBaron

 

Whitman and Diz, I have also heard good things of Stephen Moyer's but I can not testify for it

[Josh4580]

http://www.distressed-debt-investing.com/2009/06/distressed-debt-reading-list.html

 

Check that out

[alertmeipp]

wow.. 28 cents...  is it a bargain or what?

I thought there was a EC backed right offering plan?

 

Sorry for those who got in.

[Josh4580]

It sold off on news Cetus Capital sold out $183,000 worth of stock.  They were part of the backstop group consisting of the following:

 

Oak Hill Advisors

Cetus Capital

P. Schoenfeld Asset Management

Avenue Investments

Avenue International

Avenue-CDP Global Opportunities Fund

Avenue Special Situations Fund VI

Lagrange Capital

KVO Capital

Ahab Capital

Cheever Partners

 

On page 14 of the EC plan the following is footnote 8:

 

Shortly before submission of this Disclosure Statement, one of the Plan Equity Sponsors informed the Equity

Committee that it was considering reducing the amount of its commitment. The Equity Committee is

continuing discussions with such Plan Equity Sponsor, the other Plan Equity Sponsors and certain other

potential plan equity sponsors to ensure that the entire amount of the Rights Offering is committed and intends

to demonstrate the commitment in connection with the motion seeking entry of the Approval Order.

 

 

This was most likely Cetus, a very small player it seems.

 

[doc75]

It appears that today the creditors filed an objection to the entry of the equity ctee's original plan, and the equity ctee submitted a revised plan that leaves equity holders with somewhat less...

 

I haven't dug into all the numbers, but the creditors objection is convincing and the equity revised plan doesn't really address the main issues. 

 

Josh/Myth/anyone:  Have you done your own evaluation of this?  The equity ctee's plan is predicated on certain arrangements/negotiations regarding environmental liabilities being in effect, whereas there is already testimony on record that indicates that the settlements of liabilities may not stand under the equity ctee's proposal.

 

This is a tough one to add up.  It's easy to believe the massive scale of environmental liabilities could wipe out any and all enterprise value... so the settlements are an integral part of it all.  But the gov't wouldn't be happy seeing value transferred to shareholders while they were left holding the bag for cleanup, and if the creditors aren't made whole then the equity plan skirts the bankruptcy law by assigning value to junior capital holders.

 

It's an interesting case to read about. Do you have any thoughts on these things? 

 

It looks like it could be a great investment before THursday if one could assign some reasonable probability to the equity committee's plan being allowed.  My gut says it's a lot lower than 50-50, but as usual I know nothing about these things.

 

 

 

 

 

 

 

[PlanMaestro]

For those of you looking for a explosive Q with downside protection, you might want to check MMPIQ. It is very illiquid and small for a fund.

 

I am not trying to take over this thread. However, this article published today was too great a summary on the Meruelo Maddux situation not to share. What it does not say is the percentage of the new shares that current shareholders would keep with each plan. For that, I recommend to go directly to the source... Pacer. Lots of recent information.

 

http://www.labusinessjournal.com/news/2010/sep/20/investor-courts-creditor-clash/

 

The Background

 

The release is just the latest in what has become a bitter dispute over the future of the largest land owner in downtown Los Angeles. Meruelo Maddux filed for Chapter 11 bankruptcy protection in March 2009 when it was unable to make payments on $266 million in debt.

 

At the time, the company had amassed a portfolio of 4 million square feet, about 3.4 million of which was in the downtown area, mostly in eastern industrial neighborhoods. The company planned to develop much of its property into residential and mixed-use projects but was hit hard by the real estate bust.

 

Meruelo Maddux’s efforts to restructure have been complicated by two rival reorganization plans – one from note holders East West and Legendary Investors Group No. 1 LLC, and another from shareholders Charlestown Capital Advisors LLC and Hartland Asset Management Corp.

 

The Plans of Reorganization

 

As part of its joint reorganization plan with East West, Legendary would give the newly formed company a $5 million cash infusion and $65 million in debt would be converted to equity in the form of stock. Krause said that the bank would own less than one-third of the stock of the new company and would sell the shares “to obtain repayment of our loans.”

 

“We are just collecting a loan and are not seeking to own other companies or speculate in real estate,” he said.

 

Schechter said debt-to-equity conversions are a fairly common tactic in corporate bankruptcies.

 

“They are essentially seeking debt repayment in the form of stock ownership hoping for an upside at the end of the day. Otherwise, what will they get?” he said.

 

Meanwhile, Meruelo Maddux’s own plan calls for selling some assets and refinancing others to pay back its debts. Secured creditors, such as banks, would be paid in full after five years. Some unsecured creditors would get paid in full almost immediately, though others would get paid after five years. The company has already reached settlements with some of its creditors.

 

The third plan, by Charlestown and Hartland, includes a cash infusion of about $30 million. Hartland is a White Plains, N.Y.-based asset manager that invests in real estate and renewable energy. Charlestown, based in New York, is a private merchant banking company that specializes in financial advisory services to emerging companies. Hartland founder Lee Smith declined comment.