ZINC - Horsehead Holding Corp

[LC]

http://www.streetinsider.com/Corporate+News/Horsehead+Holding+(ZINC)+Said+in+Grace+Period+After+Coupon+Miss+-+Bloomberg,+Citing+Debtwire/11216870.html

[hobbit]

I feel confident that the debt will be restructured with stretched out call dates giving them enough time to fix the issues. You don't want to take a commodity based company into bankruptcy in a bearish commodity market if you can avoid it. even though i am sitting at a big loss , i am not all worried about future prospects for this. Market seems to be missing a trick like it often does

[finetrader]

If they restructure, it means that they have too much debt and need to lowered it.

 

This by itself means that they cannot repay debtholders in full, so they need to exchange debt for equity.

 

So, unless operations(plant & zinc price) improve significantly during the restructuring process, it means that actual equity is pretty much worthless.

 

 

 

 

[Picasso]

Hmm I don't think people on here know what restructuring means. Also has nothing to do with call dates or not wanting to own this in a down cycle. If that is true why does anyone still own the equity then?  Doesn't make sense that the equity is valuable to current shareholders but not a valuable currency to bondholders.

[finetrader]

I feel confident that the debt will be restructured with stretched out call dates giving them enough time to fix the issues

 

They missed a payment!  What other proof do you need to be convinced they filed for chapter 11

[SnarkyPuppy]

Doesn't a restructuring imply reducing debt/extending payment/debt forgiveness?  I don't think a liquidation/bankruptcy is what is at play here - what is more likely is a restructuring which dilutes current equity holders

[coc]

Cloner's original idea with 95 questions of checklist-passed investment seems like headed for bankruptcy!.

 

I'm puzzled what kind of checklist allowed ZINC and CHK through, among others. It's a very interesting learning lesson. And I think Mohnish is extremely smart, which makes it all the more interesting.

 

Remember, though, not every company (if any) passes the entire checklist. It's really just a way to crystallize the risks you are taking -- not a fool proof method.

 

When you make successful investments, you can credit the checklist, and then when you invest big %'s in a zero and an almost-zero, the checklist is absolved as not being perfect? C'mon. There is something to be learned here. I'm not trying to be hard on Mohnish, again, I think he's smart and generally very honest. And I admire his philanthropy greatly.

 

But with Pinnacle, Delta Financial, Cryptologic and now Horsehead going under, plus the meaningful stake in CHK which he managed to sell just in time, fortunately...it begins to beg the question if there's something being missed on a systematic basis.

 

I'm also very interested in the rationalizations on this board as the company failed time and time again, many times with the rationale being related to Mohnish buying more, or not selling, etc. I learned the coat-tailing lesson the hard way once too many years ago, so I'm not being judgmental. It's just interesting and I hope educational for some.

[BG2008]

I feel like an ultra-contrarian on a message board full of contrarians, but I find it likely that the liquidation tangible assets minus debt > current market cap.

 

But as this stock has always been, it's basically a gamble.

 

First of all, if you've never invested in a Chapter 11 or 7, you should not make a statement like that.  I have dabbled in the restructuring process and I can say the following:

 

1) Bankruptcies are gun fight, don't bring a knife to it.  In a chapter 11, every class will be arguing for their best interest.  The equity will claim there's value for the equity, the convert will argue that the equity is wiped out and they should be the fulcrum, the senior will argue that there's no value for the equity or the convert.  It's a brutal, tough, and contentious process. 

 

2) People do not pay fair market value - People pay distress value in bankruptcies.  So you think something is ZoChem and InMetco are worth X time EV/EBITDA multiple in a widely marketed process?  In a BK process, people who buy these assets are the likes of Oaktree, strategics, etc.  They're vultures.  They're bottom feeders.  As the entire commodity sector is suffering in 2016, the eligible buyer with the right balance sheet is far and few in between.  So whatever X times, take a couple turns out of it. 

 

3) Everything still depends on whether they can ramp Moorsehead.  Given that the new plant is only the 3rd or 4th plant in the world to use this type of technology, I doubt there are any buyers at today's production rate.  How much value gets allocated to equity will be highly contingent on whether the plant can ramp in BK.  You need about 3-5 things to go right in addition to the plant ramping to 100% while in BK for equity to recovery, namely zinc metal prices to go above a certain level, demonstrating cashflow, equity class need to convince court and debt holders that there is ample security left over to everyone.  At today's zinc price, even if the plant were to ramp to 100%, it's a tough argument. 

 

4) Watch for the DIP loan.  Size and terms of the DIP loan will likely dictate how much recovery equity.  Often time, DIP loans are too short.  If the plant needs another 12 months to ramp, then a DIP loan which would typically call for partially repayment in 6 months will be difficult to execute a turn around. 

 

5) Rumors of hiring restructuring specialist means that capital market options are not really available at this point.  These things tend to be self fulfilling. 

 

6) Sale of Zochem and InMetc is not possible now.  There's a concept called fraudulent conveyance.  Any buyer will rather wait till after they file for BK to bid on the assets.  This is one of those interesting dynamics.  If you fear that a company will file for BK, then you don't try to buy any of the asset out of fear that the creditors may come after you after they file for BK claiming that assets are wrongfully transferred out prior to BK.

 

7) Like I have said earlier, the value investing technique of averaging down works wonders if there is a large margin of safety.  Averaging down into a call option is very different.  Unless you think that the asymmetry has significantly increased. 

 

I often explain to my family members that bad things tend to happen in clusters.  Commodity price drops, multiples contract, capital markets close.  They are inherently pro-cyclical and tends to magnify.  This is clearly the case here. 

 

Best of luck to everyone.   

[luck]

don't think mohnish sized any of his other zero's at 20+% though (prior to drop).  amazing. 

 

guessing he will provide some thoughts to his fund's investors.  guy spier with the aquamarine fund, who was heavily invested, might do the same.  posco, pkx, is another commodity position that has jackknifed down in both pabrai funds & aquamarine funds. 

[LC]

I'm also very interested in the rationalizations on this board as the company failed time and time again, many times with the rationale being related to Mohnish buying more, or not selling, etc. I learned the coat-tailing lesson the hard way once too many years ago, so I'm not being judgmental. It's just interesting and I hope educational for some.

 

I learned this lesson the hard way. Luckily wasn't too hard in absolute terms but I've never had a 100% loss. I've come to the conclusion that coat-tailing, cloning, whatever u want to call it...is useless. Do your own homework.

[Guest anilpandit]

Volume is 8 million today. So WHO is selling and WHO is buying. Do buyers know more than sellers ? Any one shed some light here.

[Agrippa07]

I feel like an ultra-contrarian on a message board full of contrarians, but I find it likely that the liquidation tangible assets minus debt > current market cap.

 

But as this stock has always been, it's basically a gamble.

 

First of all, if you've never invested in a Chapter 11 or 7, you should not make a statement like that.  I have dabbled in the restructuring process and I can say the following:

 

1) Bankruptcies are gun fight, don't bring a knife to it.  In a chapter 11, every class will be arguing for their best interest.  The equity will claim there's value for the equity, the convert will argue that the equity is wiped out and they should be the fulcrum, the senior will argue that there's no value for the equity or the convert.  It's a brutal, tough, and contentious process. 

 

2) People do not pay fair market value - People pay distress value in bankruptcies.  So you think something is ZoChem and InMetco are worth X time EV/EBITDA multiple in a widely marketed process?  In a BK process, people who buy these assets are the likes of Oaktree, strategics, etc.  They're vultures.  They're bottom feeders.  As the entire commodity sector is suffering in 2016, the eligible buyer with the right balance sheet is far and few in between.  So whatever X times, take a couple turns out of it. 

 

3) Everything still depends on whether they can ramp Moorsehead.  Given that the new plant is only the 3rd or 4th plant in the world to use this type of technology, I doubt there are any buyers at today's production rate.  How much value gets allocated to equity will be highly contingent on whether the plant can ramp in BK.  You need about 3-5 things to go right in addition to the plant ramping to 100% while in BK for equity to recovery, namely zinc metal prices to go above a certain level, demonstrating cashflow, equity class need to convince court and debt holders that there is ample security left over to everyone.  At today's zinc price, even if the plant were to ramp to 100%, it's a tough argument. 

 

4) Watch for the DIP loan.  Size and terms of the DIP loan will likely dictate how much recovery equity.  Often time, DIP loans are too short.  If the plant needs another 12 months to ramp, then a DIP loan which would typically call for partially repayment in 6 months will be difficult to execute a turn around. 

 

5) Rumors of hiring restructuring specialist means that capital market options are not really available at this point.  These things tend to be self fulfilling. 

 

6) Sale of Zochem and InMetc is not possible now.  There's a concept called fraudulent conveyance.  Any buyer will rather wait till after they file for BK to bid on the assets.  This is one of those interesting dynamics.  If you fear that a company will file for BK, then you don't try to buy any of the asset out of fear that the creditors may come after you after they file for BK claiming that assets are wrongfully transferred out prior to BK.

 

7) Like I have said earlier, the value investing technique of averaging down works wonders if there is a large margin of safety.  Averaging down into a call option is very different.  Unless you think that the asymmetry has significantly increased. 

 

I often explain to my family members that bad things tend to happen in clusters.  Commodity price drops, multiples contract, capital markets close.  They are inherently pro-cyclical and tends to magnify.  This is clearly the case here. 

 

Best of luck to everyone. 

 

Great comment, thanks!

High risk investment that didn't play out, I just try to see this as a learning experience to learn from my mistakes.

 

If anyone is still interested.. :P, the Boston college just posted a video from Pabrai's conference on the 3rd of Dec. 2015:

[AzCactus]

Great comment, thanks!

High risk investment that didn't play out, I just try to see this as a learning experience to learn from my mistakes.

 

If anyone is still interested.. :P, the Boston college just posted a video from Pabrai's conference on the 3rd of Dec. 2015:

 

Not to take a dig at a guy who is down but maybe he should have spent that two hours selling Zinc instead. 

[walt373]

Enormous volume in the $1 June calls. Here's a trade with stock at 70c and calls for 5c: short ZINC and buy 2x calls. You win if the shares trade past 0.60 or 1.40 by June. That seems likely whether they file for bankruptcy or make the interest payment, considering they were at 1.40 just yesterday.

[Guest anilpandit]

I don't know what Mohnish may be thinking.. He lost 80 million so far in this trade.

[Picasso]

I'm curious if anyone invested with Pabrai is going to redeem after this. Seems like he takes on a lot of risk for any returns he generates. Going to be a long time before he gets paid on the fund performance, especially if we see his other heavy cyclicals head lower. Seems like the worst possible time to be in some of these cyclicals.

[luck]

yeah, 80 million.  hard to have anticipated zinc price fall, but, with respect to plant issues, guessing cfo he brought into the annual meeting and others probably painted a false picture of hope.  even now, management coming up with some "grace period" excuse.  unbelievable that pabrai got into bed with this team.

 

not to bash pabrai though, i made a tremendous amount of money on fiat, which was first brought to my attention by pabrai & spier.  he seems to be a great person all around.  i just think he has an almost insane appetite for risk. 

[Guest Grey512]

Redemptions are a common theme now.

 

Sequoia investors will redeem.

Pabrai folks will redeem.

A bunch of LPs in activist vehicles will redeem.

 

 

[writser]

Enormous volume in the $1 June calls. Here's a trade with stock at 70c and calls for 5c: short ZINC and buy 2x calls. You win if the shares trade past 0.60 or 1.40 by June. That seems likely whether they file for bankruptcy or make the interest payment, considering they were at 1.40 just yesterday.

 

Potentially interesting idea but the borrow rate is at 15% and there is no inventory.

[tylerdurden]

Shouldn't they have issued an 8-k so far? Lazard is hired for restructuring and still no disclosure from the company?

[walt373]

Enormous volume in the $1 June calls. Here's a trade with stock at 70c and calls for 5c: short ZINC and buy 2x calls. You win if the shares trade past 0.60 or 1.40 by June. That seems likely whether they file for bankruptcy or make the interest payment, considering they were at 1.40 just yesterday.

 

Potentially interesting idea but the borrow rate is at 15% and there is no inventory.

 

15%/yr is very low considering this trade should resolve in the near term. IB has shares right now.

[writser]

Enormous volume in the $1 June calls. Here's a trade with stock at 70c and calls for 5c: short ZINC and buy 2x calls. You win if the shares trade past 0.60 or 1.40 by June. That seems likely whether they file for bankruptcy or make the interest payment, considering they were at 1.40 just yesterday.

 

Potentially interesting idea but the borrow rate is at 15% and there is no inventory.

 

15%/yr is very low considering this trade should resolve in the near term. IB has shares right now.

 

Yes, but not a meaningful amount and rates have been much higher in the past. Too risky for my taste.

[walt373]

On the other hand, longs should probably sell their shares and replace them with those calls. You can get more upside with a fraction of the risk.

[500pages]

Given that they can raise $50m ATM at any time, I still don't follow why they would miss a 1.8m coupon. It's not like they are actually out of cash, I think.

 

Btw, I have to assume they were clever enough to time ATM sales to before, rather than after bad news -- like being in grace period of missing a coupon or hiring a restructuring firm.

 

If they are delaying payment while they negotiate with secured bondholders, I don't see why their hand would be forced (to file for Ch 11) until they actually run out of money, and actually have to miss a payment.

Anyone care to shed some light?

 

[walt373]

ACI just filed for bk a couple days ago with $600m in cash so...