ZINC - Horsehead Holding Corp

[moody202]

I think the CEO and the Management team needs to be sued for making exaggerated claims without facts and misleading shareholders....is that possible? I am surprised the CEO has not been fired. Additionally people on this board address him as Mr... What does he deserve this respect for? Being delusional and tanking the company??

[cmlber]

I think the CEO and the Management team needs to be sued for making exaggerated claims without facts and misleading shareholders....is that possible? I am surprised the CEO has not been fired. Additionally people on this board address him as Mr... What does he deserve this respect for? Being delusional and tanking the company??

 

I would be shocked if the management team is not sued.  In late February 2015 the management team was reaffirming guidance of 75% capacity utilization at the end of Q1!  I find it hard to believe that this was just an honest miscalculation.

[oddballstocks]

I think the CEO and the Management team needs to be sued for making exaggerated claims without facts and misleading shareholders....is that possible? I am surprised the CEO has not been fired. Additionally people on this board address him as Mr... What does he deserve this respect for? Being delusional and tanking the company??

 

I would be shocked if the management team is not sued.  In late February 2015 the management team was reaffirming guidance of 75% capacity utilization at the end of Q1!  I find it hard to believe that this was just an honest miscalculation.

 

Especially in light of the fact that a YEAR ago they were in court stating that the plant can't be finished due to bad parts, bad suppliers, and key personnel leaving.  They were suiting suppliers and people a year ago and said in effect they were dead in the water, yet to investors they continued to say things were on track.  This is public, search PACER, or the Pittsburgh Business Times.

[racemize]

Do you have a link? I'm having trouble finding a good article on it.

[rishig]

Does anyone have an estimate of what the unsecured holders will receive based on how the bankruptcy is progressing?  Is it possible for a retail investor to invest in the secured notes (believe it was a private placement)?

 

I am trying to determine if it is worth buying a small position in the debt to participate in the post bankruptcy value.  I have very limited restructuring experience, so any thoughts from the group would be appreciated.

 

Thanks.

 

 

 

Here is one way to think about this. Let's look at EBITDA generated over the past few years from operations and look at the capital structure:

 

Operations:

	2014	2013	2012	2011	2010
Net Sales	454	442	436	451	382
Cost of Sales	415	415	433	377	306
SG&A	24	22	21	23	19
EBITDA	15	5	-18	51	58
EBITDA Margin	3.2%	1.1%	-4.1%	11.3%	15.2%

 

Capital Structure:

Sept 2015	in $ millions
DIP Financing	80
Senior Secured:
Macquarie Credit Facility	59
Zochem Credit Facility	8
Credit Agreement	18
10.5% Senior Secured Notes	205
Total Senior Secured	291
Senior Unsecured:
9% Senior Unsecured	40
3.8% Convertible Notes	92
Total Senior Unsecured	132
TOTAL	503

 

Here are two key questions that the restructuring committee / bankruptcy court will ask:

(1) What is conservative valuation of the business in order to protect the creditors?

(2) What is conservative debt the business can support given the operational risks of bringing up a plant and exposure to commodity prices?

 

For (1), to the creditors, it does not matter what the fair value of the business is, they just want to protect their principal, so they tend to use the most conservative valuation. Assuming they still trust the restructuring plan of bringing up the plant in 18 months (which is a big question), EBITDA that can be generated from the business is ~$100M. A conservative senior secured creditor will basically give no more than 2-3x EV/EBITDA valuation to the business in the best case given that EBITDA generation is at least 18 months away. So, that gets you $200-$300M in EV.

 

For (2), management will want to use the opportunity of Ch. 11 to de-risk the company. Given that current business generates about $15M in EBITDA in the best case in the last 5 years, debt post restructuring should be no more than $50-$100M.

 

So, use these two variables, and you have one possible (and in my opinion, likely) outcome:

EV: $300M

Target Debt: $100M

Target Equity: $200M

 

DIP Financing Recovery (100%): $80M

Senior Secured Recovery (7%): $20M

Senior Secured Equity (100%): $200M

Senior Unsecured Recovery (0%): 0

 

Unless, the committee awards a higher valuation to the business, it is unlikely that unsecured recover anything. In fact, given that the secured holds most of the unsecured notes, it is in their best interest to award a low valuation, so they can get most of the equity. There is very little risk of hold out since they control the unsecured.

 

My 2c. I have no horse in the race, but I am following the case just to learn how the restructuring takes place.

 

Here is one of the best books on distressed debt investing:

http://www.amazon.com/Distressed-Debt-Analysis-Strategies-Speculative/dp/1932159185/ref=sr_1_3?ie=UTF8&qid=1455737140&sr=8-3&keywords=Stephen+Moyer

 

 

[oddballstocks]

Do you have a link? I'm having trouble finding a good article on it.

 

http://www.post-gazette.com/business/pittsburgh-company-news/2016/02/01/Len-Boselovic-s-Heard-off-the-Street-Horsehead-Holding-barely-holding-on-by-a-thread/stories/201601310257

[dabuff]

For those of us still in the stock, Guy Spier is heading a shareholder's committee (please see the link since the proceedings seem to be moving quickly):

 

https://finance.yahoo.com/news/guy-spier-calls-attention-horsehead-231652582.html

[moody202]

I think the CEO and the Management team needs to be sued for making exaggerated claims without facts and misleading shareholders....is that possible? I am surprised the CEO has not been fired. Additionally people on this board address him as Mr... What does he deserve this respect for? Being delusional and tanking the company??

 

I would be shocked if the management team is not sued.  In late February 2015 the management team was reaffirming guidance of 75% capacity utilization at the end of Q1!  I find it hard to believe that this was just an honest miscalculation.

 

Is there opportunity for us board members to come together on this to put a case against the management?

 

I have no idea how Guy Spier's efforts will relate to this.

 

[str8shot]

Does anyone have an estimate of what the unsecured holders will receive based on how the bankruptcy is progressing?  Is it possible for a retail investor to invest in the secured notes (believe it was a private placement)?

 

I am trying to determine if it is worth buying a small position in the debt to participate in the post bankruptcy value.  I have very limited restructuring experience, so any thoughts from the group would be appreciated.

 

Thanks.

 

 

 

Here is one way to think about this. Let's look at EBITDA generated over the past few years from operations and look at the capital structure:

 

Operations:

	2014	2013	2012	2011	2010
Net Sales	454	442	436	451	382
Cost of Sales	415	415	433	377	306
SG&A	24	22	21	23	19
EBITDA	15	5	-18	51	58
EBITDA Margin	3.2%	1.1%	-4.1%	11.3%	15.2%

 

Capital Structure:

Sept 2015	in $ millions
DIP Financing	80
Senior Secured:
Macquarie Credit Facility	59
Zochem Credit Facility	8
Credit Agreement	18
10.5% Senior Secured Notes	205
Total Senior Secured	291
Senior Unsecured:
9% Senior Unsecured	40
3.8% Convertible Notes	92
Total Senior Unsecured	132
TOTAL	503

 

Here are two key questions that the restructuring committee / bankruptcy court will ask:

(1) What is conservative valuation of the business in order to protect the creditors?

(2) What is conservative debt the business can support given the operational risks of bringing up a plant and exposure to commodity prices?

 

For (1), to the creditors, it does not matter what the fair value of the business is, they just want to protect their principal, so they tend to use the most conservative valuation. Assuming they still trust the restructuring plan of bringing up the plant in 18 months (which is a big question), EBITDA that can be generated from the business is ~$100M. A conservative senior secured creditor will basically give no more than 2-3x EV/EBITDA valuation to the business in the best case given that EBITDA generation is at least 18 months away. So, that gets you $200-$300M in EV.

 

For (2), management will want to use the opportunity of Ch. 11 to de-risk the company. Given that current business generates about $15M in EBITDA in the best case in the last 5 years, debt post restructuring should be no more than $50-$100M.

 

So, use these two variables, and you have one possible (and in my opinion, likely) outcome:

EV: $300M

Target Debt: $100M

Target Equity: $200M

 

DIP Financing Recovery (100%): $80M

Senior Secured Recovery (7%): $20M

Senior Secured Equity (100%): $200M

Senior Unsecured Recovery (0%): 0

 

Unless, the committee awards a higher valuation to the business, it is unlikely that unsecured recover anything. In fact, given that the secured holds most of the unsecured notes, it is in their best interest to award a low valuation, so they can get most of the equity. There is very little risk of hold out since they control the unsecured.

 

My 2c. I have no horse in the race, but I am following the case just to learn how the restructuring takes place.

 

Here is one of the best books on distressed debt investing:

http://www.amazon.com/Distressed-Debt-Analysis-Strategies-Speculative/dp/1932159185/ref=sr_1_3?ie=UTF8&qid=1455737140&sr=8-3&keywords=Stephen+Moyer

 

Nice distillation Rishig. Absent a far higher determination of EV, it's hard to see a scenario where the current stockholders would get a slice of the equity pie post-restructuring.

[RadMan24]

Those EBITDA numbers are nice, but you also have to factor in, who is going to provide the $80 million in financing to get the plant operational? Furthermore, the company could possibly achieve EBITDA around $120 in 3 years. With the DIP financing, that will pay off the credit lines that sent the company into Ch. 11.

 

Given the ramp up required, they will probably need to have around $40 million of liquidity in the first year. Year 2 should be sustainable, and year 3 is when they hit the ground running and start creating value (hopefully refinancing or reducing debt loads) (if any).

 

The bonds aren't scheduled to mature until 2017. I think Guy was right, an equity committee is needed, otherwise, creditors are going to run away with this. Pabrai is on the unsecured credit committee as well. Given that info, I'm not so sure this fight is over.

 

Just gotta see if equity can get anything, whether its $5 million, 10, 20, or 50, and as long as not all of the bonds are converted into equity, shareholders could recover and gain a substantial portion of their investment. No guarantee, but I would keep an eye on it as things develop.

 

 

[rishig]

Those EBITDA numbers are nice, but you also have to factor in, who is going to provide the $80 million in financing to get the plant operational? Furthermore, the company could possibly achieve EBITDA around $120 in 3 years. With the DIP financing, that will pay off the credit lines that sent the company into Ch. 11.

 

Given the ramp up required, they will probably need to have around $40 million of liquidity in the first year. Year 2 should be sustainable, and year 3 is when they hit the ground running and start creating value (hopefully refinancing or reducing debt loads) (if any).

 

The bonds aren't scheduled to mature until 2017. I think Guy was right, an equity committee is needed, otherwise, creditors are going to run away with this. Pabrai is on the unsecured credit committee as well. Given that info, I'm not so sure this fight is over.

 

Just gotta see if equity can get anything, whether its $5 million, 10, 20, or 50, and as long as not all of the bonds are converted into equity, shareholders could recover and gain a substantial portion of their investment. No guarantee, but I would keep an eye on it as things develop.

 

The creditors and shareholders interests are in conflict. Without an equity committee, there is no chance equity will recover. I am glad that Mr. Spier is taking a proactive lead at this.

 

In the end, it is up to the U.S. Trustee to allow the equity committee to be formed. Costs of operating the equity committee are borne by the creditors. So, generally, if there is a risk of insolvency, the trustee may not allow formation of an equity committee. However, if the equity committee is formed, there is a chance of a minor recovery. With about 57m shares outstanding, if the equity were given 10-20c, that's about 6-12m. It is not unheard of that the creditor committee gives a small recovery just to keep the process moving along. Also, it could just give away warrants instead. It boils down to whether the U.S. Trustee allows the formation of equity committee.

[Guest roark33]

What's the point, equity traded above 30 cents on tuesday, why not just sell? 

[str8shot]

What's the point, equity traded above 30 cents on tuesday, why not just sell?

 

Spier must think there's a chance to recover orders of magnitude times the current $.20 per share based on the net asset value of over $400M on the balance sheet. If they get $50M for the equity, that would be a 5X.

 

So for Spier's 1.32m shares, it's a question of $264k in the hand versus $1.32M if they got $1 per share. And double that if $2 per share.

 

Spier must like the risk/reward payoff potential.

[tylerdurden]

What's the point, equity traded above 30 cents on tuesday, why not just sell?

 

Spier must think there's a chance to recover orders of magnitude times the current $.20 per share based on the net asset value of over $400M on the balance sheet. If they get $50M for the equity, that would be a 5X.

 

So for Spier's 1.32m shares, it's a question of $264k in the hand versus $1.32M if they got $1 per share. And double that if $2 per share.

 

Spier must like the risk/reward payoff potential.

 

Based on both Pabrai and Spier's track record on Horsehead, I'd say Guy Spier is a little bit on the optimistic side here. Based on book value there is certainly lots of value here but how the Moorseboro plant will actually be valued in restructuring process would be key to me. Unfortunately, this is still a dysfunctional plant so you can argue much less value for it as the way it is right now if you are a noteholder who want to wipe out the equityholders...

[tylerdurden]

What's the point, equity traded above 30 cents on tuesday, why not just sell?

 

+1

[Jurgis]

What's the point, equity traded above 30 cents on tuesday, why not just sell?

 

Can they sell million+ shares at .30?

[str8shot]

What's the point, equity traded above 30 cents on tuesday, why not just sell?

 

Spier must think there's a chance to recover orders of magnitude times the current $.20 per share based on the net asset value of over $400M on the balance sheet. If they get $50M for the equity, that would be a 5X.

 

So for Spier's 1.32m shares, it's a question of $264k in the hand versus $1.32M if they got $1 per share. And double that if $2 per share.

 

Spier must like the risk/reward payoff potential.

 

Based on both Pabrai and Spier's track record on Horsehead, I'd say Guy Spier is a little bit on the optimistic side here. Based on book value there is certainly lots of value here but how the Moorseboro plant will actually be valued in restructuring process would be key to me. Unfortunately, this is still a dysfunctional plant so you can argue much less value for it as the way it is right now if you are a noteholder who want to wipe out the equityholders...

 

Agreed. They have around $780M in PPE on the balance sheet, the majority of which is Mooresboro (which requires AT LEAST another $80M to hopefully reach capacity). So how much value can you assign to this poorly performing asset that has a history of springing leaks faster than they can plug them? Not much.

[oddballstocks]

This plant has value just like an old rusted classic car pre-restoration has value.  It has value once someone dumps a TON of money into it to restore it to a salable condition.

 

If there is someone with expertise, time and capital to take on the project there is value at the end.  But in its current state I think it'll sell for a deep discount unless the ZINC team can do the restoration themselves.

[Txvestor]

And they have proven themselves incapable of doing that beyond any doubt.

[randomep]

What's the point, equity traded above 30 cents on tuesday, why not just sell?

 

Spier must think there's a chance to recover orders of magnitude times the current $.20 per share based on the net asset value of over $400M on the balance sheet. If they get $50M for the equity, that would be a 5X.

 

So for Spier's 1.32m shares, it's a question of $264k in the hand versus $1.32M if they got $1 per share. And double that if $2 per share.

 

Spier must like the risk/reward payoff potential.

 

So do you think he is buying? :)

 

[rishig]

What's the point, equity traded above 30 cents on tuesday, why not just sell?

 

Spier must think there's a chance to recover orders of magnitude times the current $.20 per share based on the net asset value of over $400M on the balance sheet. If they get $50M for the equity, that would be a 5X.

 

So for Spier's 1.32m shares, it's a question of $264k in the hand versus $1.32M if they got $1 per share. And double that if $2 per share.

 

Spier must like the risk/reward payoff potential.

 

So do you think he is buying? :)

 

What one can recover in Ch. 11. is less a function of what is the asset truly worth, and more a function of the committees and the leverage they hold. Not having an equity committee means no chance for any recovery. Guy Spier by taking an initiative is fulfilling his fiduciary duty to his shareholders. It does not matter what the chance of recovery is or how big it is. There is no harm trying. The U.S. Trustee will decide not to appoint the equity committee if there is a risk to the solvency of the business, by adding another party to the table.

[indirect]

What is the fulcrum security?

 

Is it the secured or unsecured debt? By rishi's analysis, it is secured debt and that is what the market is saying.

 

[str8shot]

What's the point, equity traded above 30 cents on tuesday, why not just sell?

 

Spier must think there's a chance to recover orders of magnitude times the current $.20 per share based on the net asset value of over $400M on the balance sheet. If they get $50M for the equity, that would be a 5X.

 

So for Spier's 1.32m shares, it's a question of $264k in the hand versus $1.32M if they got $1 per share. And double that if $2 per share.

 

Spier must like the risk/reward payoff potential.

 

So do you think he is buying? :)

 

No idea. But if he concluded that he'll have a pretty good shot at getting a bigger piece of the equity pie going forward, then he may have added some dirt cheap shares to his pot.

[rishig]

What is the fulcrum security?

 

Is it the secured or unsecured debt? By rishi's analysis, it is secured debt and that is what the market is saying.

 

Since the largest holder of secured is also the largest holder of unsecured, the creditor committee members will push for a low valuation / low leverage scenario in the restructuring in order for the secured to the fulcrum security. Also, any delay to the Ch. 11. process drains value from the overall firm to the attorneys, so in the limited time, the question is whether the minority unsecured or the equity committee can push the fulcrum security to be further down. That requires either a high valuation or a high leverage scenario post restructuring. I think given the operational risks anyone would agree that high leverage is the wrong solution, so that seems extremely unlikely. Given that the plant is not operational, making a case for high valuation seems difficult to get past the bankruptcy court. I put the chances of using a low valuation (EV/EBITDA in 2-4x range) as the most likely outcome - which means that senior secured will most likely be the fulcrum security.

[valueinvesting101]

What happens to contract for disposal of dust? That is input to the plant and companies producing those have legal obligations to dispose that dust. Would there by any liability to dispose that dust on ZINC? I guess those counter parties claim against ZINC would not yield any cash as they will be treated as unsecured holders. On the contrary running plant would like to get those contracts enforced thereby reducing possibility of environmental liability.

 

Also what would unsecured creditor do once they have all the assets? Would they sell half working/constructed plant to someone? Would they try to start it?

 

I think ZINC has already spent close $550 million on getting that plant started. In addition other assets were working so they should have value of around book or around 0.75 of book value.

 

So total value of assets outside book current plant would be about $220 million to $300 million. If plant can be sold for $100-150 million. Remaining equity could be worth 0 to $30 million provided debt is around $420 million.

 

If plant gets valued above $150 million or if other assets fetch value above $300 million the equity value could increase from $13.5 million (current market cap).