ZINC - Horsehead Holding Corp

[Green King]

First i would like to thank this thread for giving me a new mental model. McNulty Curves.

 

https://books.google.ca/books?id=1etfSdk55SYC&pg=PA26&lpg=PA26&dq=McNulty+curves&source=bl&ots=yDEY8JLTXS&sig=rQQfNB2-8lWOMdJ-S21KsxFOwdA&hl=en&sa=X&ved=0ahUKEwiRhM28s9DKAhXIJB4KHWFNAooQ6AEIQTAD#v=onepage&q=McNulty%20curves&f=false

 

Based on this model and what has occurred, you can clearly see this plant is not working and will likely take years to get online.

One can inferred from case studies of plant ramp up and what has occurred after ramp up in this case. It is highly likely that management has put pressure on contractors and stake holders to keep the plant on time and on budget. This likely forced them to cut costs and corners to achieve their goals. Instead of what is normally done which is build redundancies (margin of safety) in the plant build up and design process so that a ramp up would be more of a one-foot hurdles and then after reaching capacity small investments can be done to go beyond that.

 

What we have now is over optimized mess that is not working where multiple parts of the plant under invested. Significant cost is ahead as we all know economy of scale works towards your advantage is manufacturing when you are dealing with large outputs due to the laws of science for example geometry. What is likely required is ahead is much more plant shut down and expansive investment replacement until all bottlenecks are found.

Therefore based upon opportunity cost this should be a pass for most investors who don't have any economics or emotional sunk cost. Right now there are many good risk adjusted situations out there that ZINC should be far down your list.

 

[str8shot]

First i would like to thank this thread for giving me a new mental model. McNulty Curves.

 

https://books.google.ca/books?id=1etfSdk55SYC&pg=PA26&lpg=PA26&dq=McNulty+curves&source=bl&ots=yDEY8JLTXS&sig=rQQfNB2-8lWOMdJ-S21KsxFOwdA&hl=en&sa=X&ved=0ahUKEwiRhM28s9DKAhXIJB4KHWFNAooQ6AEIQTAD#v=onepage&q=McNulty%20curves&f=false

 

Based on this model and what has occurred, you can clearly see this plant is not working and will likely take years to get online.

One can inferred from case studies of plant ramp up and what has occurred after ramp up in this case. It is highly likely that management has put pressure on contractors and stake holders to keep the plant on time and on budget. This likely forced them to cut costs and corners to achieve their goals. Instead of what is normally done which is build redundancies (margin of safety) in the plant build up and design process so that a ramp up would be more of a one-foot hurdles and then after reaching capacity small investments can be done to go beyond that.

 

What we have now is over optimized mess that is not working where multiple parts of the plant under invested. Significant cost is ahead as we all know economy of scale works towards your advantage is manufacturing when you are dealing with large outputs due to the laws of science for example geometry. What is likely required is ahead is much more plant shut down and expansive investment replacement until all bottlenecks are found.

Therefore based upon opportunity cost this should be a pass for most investors who don't have any economics or emotional sunk cost. Right now there are many good risk adjusted situations out there that ZINC should be far down your list.

 

You nailed it. +1

[rishig]

Documents (Docket #229) filed by Guy Spier's Aquamarine Capital Management attached

Joinder_of_Aquamarine_Capital_Management__-_Main_Document_1.pdf

Joinder_of_Aquamarine_Capital_Management_LLC__-_Exhibit_A_1.pdf

Joinder_of_Aquamarine_Capital_Management_LLC__-_Exhibit_B_1.pdf

[RadMan24]

Documents (Docket #229) filed by Guy Spier's Aquamarine Capital Management attached

 

The argument is there.. Hopefully the shareholder committee gets appointed.

[alertmeipp]

First i would like to thank this thread for giving me a new mental model. McNulty Curves.

 

https://books.google.ca/books?id=1etfSdk55SYC&pg=PA26&lpg=PA26&dq=McNulty+curves&source=bl&ots=yDEY8JLTXS&sig=rQQfNB2-8lWOMdJ-S21KsxFOwdA&hl=en&sa=X&ved=0ahUKEwiRhM28s9DKAhXIJB4KHWFNAooQ6AEIQTAD#v=onepage&q=McNulty%20curves&f=false

 

Based on this model and what has occurred, you can clearly see this plant is not working and will likely take years to get online.

One can inferred from case studies of plant ramp up and what has occurred after ramp up in this case. It is highly likely that management has put pressure on contractors and stake holders to keep the plant on time and on budget. This likely forced them to cut costs and corners to achieve their goals. Instead of what is normally done which is build redundancies (margin of safety) in the plant build up and design process so that a ramp up would be more of a one-foot hurdles and then after reaching capacity small investments can be done to go beyond that.

 

What we have now is over optimized mess that is not working where multiple parts of the plant under invested. Significant cost is ahead as we all know economy of scale works towards your advantage is manufacturing when you are dealing with large outputs due to the laws of science for example geometry. What is likely required is ahead is much more plant shut down and expansive investment replacement until all bottlenecks are found.

Therefore based upon opportunity cost this should be a pass for most investors who don't have any economics or emotional sunk cost. Right now there are many good risk adjusted situations out there that ZINC should be far down your list.

 

that's somewhat similar to FTP's case, the only different is Chad is much better in managing the financials and has other leverage to pull.

 

not the case here. Be very careful here.

[valueinvesting101]

http://www.businesswire.com/news/home/20160307005111/en/Investigation-Horsehead-Holding-Corp.-Announced-Wagner-Firm

[jawn619]

For those who are wondering what happened and have not looked at the numbers, I have done a short informative case study on Horsehead.

 

http://raritancapital.com/casestudies/zinc/

 

 

I owned zinc and sold out at around $12 when I saw some red flags and felt like there was disproportionate downside.

[RadMan24]

Any word on if the equity committee was approved or rejected?

[Steven B]

Radman, the committee was not approved.

[RadMan24]

That sucks. I was hoping Guy could pull it off, that would have been fun to see.

[NoCalledStrikes]

For those who are wondering what happened and have not looked at the numbers, I have done a short informative case study on Horsehead.

 

http://raritancapital.com/casestudies/zinc/

 

 

I owned zinc and sold out at around $12 when I saw some red flags and felt like there was disproportionate downside.

 

Thanks for sharing.  Not surprisingly, while mgmt wanted to blame lower zinc processes (something outside their control) as your post-mortem shows, lack of production (something inside their control) was clearly the culprit.  At decent production levels, a drop in Zinc prices would not have put them in BK.

 

 

 

 

 

 

 

[randallchsu]

Peter Lynch talking about turnarounds starting from 21:20 mins. Applies well to ZINC as a case study

 

[rsmehta]

Zinc is now trading at $0.85 / lb

 

---------------------------------

 

    Does anyone know when this auction will take place. If lady luck is on our side, and price trends further upwards above a dollar in the next 2 months or so, who knows, the value of these assets and contracts might fetch a large price.

[rishig]

Zinc is now trading at $0.85 / lb

 

---------------------------------

 

    Does anyone know when this auction will take place. If lady luck is on our side, and price trends further upwards above a dollar in the next 2 months or so, who knows, the value of these assets and contracts might fetch a large price.

 

What auction? I haven't seen a restructuring plan yet from the bankruptcy dockets.

[Tompety03]

I've sent the attached letter on the Horsehead case to Management, Lazard and K&E and posted it on SA (link below).  I plan on trying to share it on LinkedIn across my network over the next few days.  If you are a shareholder or find what is happening to small investors in the case alarming, I ask you to do the same.

 

As someone who left finance to go work for a company, I find the lack of accountability of the Board/mgt team and the destruction of an otherwise productive company/firing of blue collar workers by the creditors particularly disturbing.  The Ad Hoc group is adding zero value to society.     

 

Regards,

Chris Collins

 

http://seekingalpha.com/article/3960923-horsehead-holding-egregious-disregard-rights-small-individual-investors

 

 

 

Horsehead_Holdings_-_Open_Letter_-_3-23-16.pdf

[Sunrider]

Out of interest - which debt issues are the ones the hedgies hold that may be interesting (I guess will convert to equity at the end of this)?

Thank you.

C.

[rishig]

Out of interest - which debt issues are the ones the hedgies hold that may be interesting (I guess will convert to equity at the end of this)?

Thank you.

C.

 

The new debt structure (and hence what debt convert to equity) is part of the restructuring plan which is still in works.

[rishig]

I've sent the attached letter on the Horsehead case to Management, Lazard and K&E and posted it on SA (link below).  I plan on trying to share it on LinkedIn across my network over the next few days.  If you are a shareholder or find what is happening to small investors in the case alarming, I ask you to do the same.

 

As someone who left finance to go work for a company, I find the lack of accountability of the Board/mgt team and the destruction of an otherwise productive company/firing of blue collar workers by the creditors particularly disturbing.  The Ad Hoc group is adding zero value to society.     

 

Regards,

Chris Collins

 

http://seekingalpha.com/article/3960923-horsehead-holding-egregious-disregard-rights-small-individual-investors

 

Thank you for your letter. 

 

The distressed debt investors are called "vultures" for a reason. This isn't the first time a company is being "stolen" from the equity holders. If you haven't read, I encourage you to read (although as an equity holder, one will be depressed) the classic book called "Vulture Investors" by Hilary Rosenberg that has cases going back to the 60s and 70s.

 

When senior secured creditors control the process, they want the restructuring to take place at the most conservative valuation to get full recovery on their investment. EV/EBITDA of 9x is not conservative. It could be the "fair" value, but the law is put in place to protect the creditors in order of their seniority. The law doesn't say that the restructuring plan should be at "fair" value.

 

I wrote a post on this topic:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/zinc-horsehead-holding-corp/msg255714/#msg255714

 

In your letter, you say that the issue was just a technical issue. Well, if that were the case, there should be plenty of investors lining up to provide them with DIP financing given that DIP has super senior priority and very well protected by the assets of the company. However, the only one willing to provide DIP financing was the one party that controlled the senior secured debt. And I presume, they did so, to protect their secured notes position.

 

In my opinion, if one is investing in the equity of a levered company, one should be willing to take the risk that in a bankruptcy (due to liquidity constraints or technical issues) the company may be "stolen" away from them at less than "fair" value.

 

 

[Sunrider]

Out of interest - which debt issues are the ones the hedgies hold that may be interesting (I guess will convert to equity at the end of this)?

Thank you.

C.

 

The new debt structure (and hence what debt convert to equity) is part of the restructuring plan which is still in works.

 

Yes but which ones of the original bonds - presume they still trade?

Thanks.

[rishig]

Out of interest - which debt issues are the ones the hedgies hold that may be interesting (I guess will convert to equity at the end of this)?

Thank you.

C.

 

The new debt structure (and hence what debt convert to equity) is part of the restructuring plan which is still in works.

 

Yes but which ones of the original bonds - presume they still trade?

Thanks.

 

Capital Structure:

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

 

9% unsecured and 3.8% convertible trade in secondary. The rest don't. If you want to purchase the secured, you can find the list of secured creditors from the bankruptcy dockets, call them and negotiate a purchase. At this point, it's not even a given, that the unsecured will be fulcrum. One senior secured party controls a majority position - he would push for a low valuation in the restructuring to extract as much value as he can (because he can given his majority position).

 

As per my earlier analysis here (http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/zinc-horsehead-holding-corp/msg255714/#msg255714), if that occurs, the unsecured may lose 100%. If not, then the unsecured may convert to some portion of the new equity. What is the value of the equity swapped relation to what you are paying for the unsecured? I think at this point it is highly speculative. I would just stay away.

[arcube]

In my opinion, if one is investing in the equity of a levered company, one should be willing to take the risk that in a bankruptcy (due to liquidity constraints or technical issues) the company may be "stolen" away from them at less than "fair" value.

 

+1. Thank you Rishi. It's a tough lesson but is needed to be learned to become a real well rounded investor. Thanks for your informative posts. I agree with you and do not believe company was stolen away. Lot of major investors were sitting sucking their thumbs rather than coming up with some creative solutions when there was clear writing on the wall. Major equity owners had enough time to come up with some alternative (some discussed in certain posts earlier) but they did not. Post covenant/coupon payment breach coming up with a thesis for rich valuation as fair valuation is just fantasy!

[Tompety03]

rishig - thanks for the feedback and I will pick up the book suggestion.  the intent of the letter was to attract a broader audience outside of the investing community, so the language may not reflect the technical practices in a bankruptcy case.  For a reader without restructuring experience, just looking at the winners (one large hedge fund) and losers (productive company, small shareholders, blue collar workers) and the expected outcome (Greywolf flipping this company back to public markets in a short period for a huge return and shareholders losing all capital), it does not feel like the intended outcome of the financial system/courts. 

 

Re the DIP facility, I was not able to talk to Lazard, but Guy Spier did and they told him they had not pursued any other DIP financing sources.  See the letter below from the docket.  It seems like the company has completely disregarded their fiduciary duties to shareholders. 

 

Chris 

 

http://dm.epiq11.com/HOC/Document/GetDocument/2774029 

[rishig]

rishig - thanks for the feedback and I will pick up the book suggestion.  the intent of the letter was to attract a broader audience outside of the investing community, so the language may not reflect the technical practices in a bankruptcy case.  For a reader without restructuring experience, just looking at the winners (one large hedge fund) and losers (productive company, small shareholders, blue collar workers) and the expected outcome (Greywolf flipping this company back to public markets in a short period for a huge return and shareholders losing all capital), it does not feel like the intended outcome of the financial system/courts. 

 

Re the DIP facility, I was not able to talk to Lazard, but Guy Spier did and they told him they had not pursued any other DIP financing sources.  See the letter below from the docket.  It seems like the company has completely disregarded their fiduciary duties to shareholders. 

 

Chris 

 

http://dm.epiq11.com/HOC/Document/GetDocument/2774029

 

The intended outcome for the 1978 Bankruptcy Reform Act is to protect the creditors in order of priority, and nothing else. Unfortunately, this is the outcome for thousands of companies that go through Chapter 11, where creditors control the company post bankruptcy and equity holders lose all the value. It does not matter whether the creditors then flip the company at a much higher valuation down the road. The 1978 Bankruptcy Reform Act allows debtors to propose a restructuring plan (which isn't proposed yet in Horsehead's case) and the creditors to vote on the plan. In some unusual cases, the U.S. Trustee allows an equity committee to be formed, if there is no risk to insolvency to the company by adding the equity committee (and the potential delay) and there is a chance of recovery.

 

In Horsehead's case, the independent valuation and the equity committee formation arguments weren't compelling enough for the U.S. Trustee to allow the equity committee to be formed. I am not sure if one can blame anyone else for that decision.

 

Having said that, the time to take action for the equity holders was in 2015. In any levered company, there is the possibility that time becomes the enemy and the debt holders take over the company. As equity holders, letters should have gone out to the management to push to raise considerable equity and to get waivers on any potential covenants that could lead to a technical default. The raise of equity would have given the bank the necessary protection and potentially loan margins to consider covenant waivers.

 

This is a hard lesson for equity holders, but unfortunately, I think it's a mistake that the equity holders weren't aggressive enough to protect their investment last year. If they had pushed management to raise another $200M, I doubt they would be in court today. Not to say management is not to be blamed, but I doubt that this will change the outcome in Chapter. 11. The only recource is to find compelling evidence that management violated its fiduciary duties and sue them in court (which is also very hard in my opinion).

 

I am sorry for the loss of equity investors, and even as an observer, this is a hard lesson. Beware of highly indebted companies (i.e. cheap but not safe) no matter how deep the "moat" is.

[SnarkyPuppy]

rishig - thanks for the feedback and I will pick up the book suggestion.  the intent of the letter was to attract a broader audience outside of the investing community, so the language may not reflect the technical practices in a bankruptcy case.  For a reader without restructuring experience, just looking at the winners (one large hedge fund) and losers (productive company, small shareholders, blue collar workers) and the expected outcome (Greywolf flipping this company back to public markets in a short period for a huge return and shareholders losing all capital), it does not feel like the intended outcome of the financial system/courts. 

 

Re the DIP facility, I was not able to talk to Lazard, but Guy Spier did and they told him they had not pursued any other DIP financing sources.  See the letter below from the docket.  It seems like the company has completely disregarded their fiduciary duties to shareholders. 

 

Chris 

 

http://dm.epiq11.com/HOC/Document/GetDocument/2774029

 

The intended outcome for the 1978 Bankruptcy Reform Act is to protect the creditors in order of priority, and nothing else. Unfortunately, this is the outcome for thousands of companies that go through Chapter 11, where creditors control the company post bankruptcy and equity holders lose all the value. It does not matter whether the creditors then flip the company at a much higher valuation down the road. The 1978 Bankruptcy Reform Act allows debtors to propose a restructuring plan (which isn't proposed yet in Horsehead's case) and the creditors to vote on the plan. In some unusual cases, the U.S. Trustee allows an equity committee to be formed, if there is no risk to insolvency to the company by adding the equity committee (and the potential delay) and there is a chance of recovery.

 

In Horsehead's case, the independent valuation and the equity committee formation arguments weren't compelling enough for the U.S. Trustee to allow the equity committee to be formed. I am not sure if one can blame anyone else for that decision.

 

Having said that, the time to take action for the equity holders was in 2015. In any levered company, there is the possibility that time becomes the enemy and the debt holders take over the company. As equity holders, letters should have gone out to the management to push to raise considerable equity and to get waivers on any potential covenants that could lead to a technical default. The raise of equity would have given the bank the necessary protection and potentially loan margins to consider covenant waivers.

 

This is a hard lesson for equity holders, but unfortunately, I think it's a mistake that the equity holders weren't aggressive enough to protect their investment last year. If they had pushed management to raise another $200M, I doubt they would be in court today. Not to say management is not to be blamed, but I doubt that this will change the outcome in Chapter. 11. The only recource is to find compelling evidence that management violated its fiduciary duties and sue them in court (which is also very hard in my opinion).

 

I am sorry for the loss of equity investors, and even as an observer, this is a hard lesson. Beware of highly indebted companies (i.e. cheap but not safe) no matter how deep the "moat" is.

 

Absolutely hear what you're saying and I don't entirely disagree.  But do you absolutely dismiss the points raised in Tompety's letter?  Is there truly no fiduciary breach on the part of management, or have they succeeded in playing the role of a lawyer in making grey what is truly black and white? 

 

I am not an expert in bankruptcy proceedings and do not claim to be.  So this may be simply a disconnect between the way things work versus what seems sensical.  But after being involved in the details of Horsehead for a while now, reading through the various documents that Spier and friends have produced, and considering the various points raised in Tompety03's letter, it seems at a minimum, somewhat suspicious that the owners of the company have no word in bankruptcy given the facts regarding valuation.   

[rishig]

rishig - thanks for the feedback and I will pick up the book suggestion.  the intent of the letter was to attract a broader audience outside of the investing community, so the language may not reflect the technical practices in a bankruptcy case.  For a reader without restructuring experience, just looking at the winners (one large hedge fund) and losers (productive company, small shareholders, blue collar workers) and the expected outcome (Greywolf flipping this company back to public markets in a short period for a huge return and shareholders losing all capital), it does not feel like the intended outcome of the financial system/courts. 

 

Re the DIP facility, I was not able to talk to Lazard, but Guy Spier did and they told him they had not pursued any other DIP financing sources.  See the letter below from the docket.  It seems like the company has completely disregarded their fiduciary duties to shareholders. 

 

Chris 

 

http://dm.epiq11.com/HOC/Document/GetDocument/2774029

 

The intended outcome for the 1978 Bankruptcy Reform Act is to protect the creditors in order of priority, and nothing else. Unfortunately, this is the outcome for thousands of companies that go through Chapter 11, where creditors control the company post bankruptcy and equity holders lose all the value. It does not matter whether the creditors then flip the company at a much higher valuation down the road. The 1978 Bankruptcy Reform Act allows debtors to propose a restructuring plan (which isn't proposed yet in Horsehead's case) and the creditors to vote on the plan. In some unusual cases, the U.S. Trustee allows an equity committee to be formed, if there is no risk to insolvency to the company by adding the equity committee (and the potential delay) and there is a chance of recovery.

 

In Horsehead's case, the independent valuation and the equity committee formation arguments weren't compelling enough for the U.S. Trustee to allow the equity committee to be formed. I am not sure if one can blame anyone else for that decision.

 

Having said that, the time to take action for the equity holders was in 2015. In any levered company, there is the possibility that time becomes the enemy and the debt holders take over the company. As equity holders, letters should have gone out to the management to push to raise considerable equity and to get waivers on any potential covenants that could lead to a technical default. The raise of equity would have given the bank the necessary protection and potentially loan margins to consider covenant waivers.

 

This is a hard lesson for equity holders, but unfortunately, I think it's a mistake that the equity holders weren't aggressive enough to protect their investment last year. If they had pushed management to raise another $200M, I doubt they would be in court today. Not to say management is not to be blamed, but I doubt that this will change the outcome in Chapter. 11. The only recource is to find compelling evidence that management violated its fiduciary duties and sue them in court (which is also very hard in my opinion).

 

I am sorry for the loss of equity investors, and even as an observer, this is a hard lesson. Beware of highly indebted companies (i.e. cheap but not safe) no matter how deep the "moat" is.

 

Absolutely hear what you're saying and I don't entirely disagree.  But do you absolutely dismiss the points raised in Tompety's letter?  Is there truly no fiduciary breach on the part of management, or have they succeeded in playing the role of a lawyer in making grey what is truly black and white? 

 

I am not an expert in bankruptcy proceedings and do not claim to be.  So this may be simply a disconnect between the way things work versus what seems sensical.  But after being involved in the details of Horsehead for a while now, reading through the various documents that Spier and friends have produced, and considering the various points raised in Tompety03's letter, it seems at a minimum, somewhat suspicious that the owners of the company have no word in bankruptcy given the facts regarding valuation. 

 

I understand what you saying that the owners of the company should have a stake in the restructuring, given how management has behaved. One could raise this with the U.S. Trustee (quite likely the ad-hoc equity committee already tried this), but the final decision is up to the U.S. Trustee. If there is any risk of insolvency due to delay by adding another committee, the U.S. Trustee is unlikely to approve. The U.S. Trustee's goal is to follow the law, not to favor one party over the other.

 

The Bankruptcy Law confers the vote of the restructuring plan on the creditor committee. Grey controls the process because they own the DIP, and majority of the secured and unsecured. It's out of management's control at this point. They are just trying to protect their jobs and not get fired by probably coming up with a plan that appeases the majority holder. Comments like management is violating its fiduciary duties because it is letting Grey make the decisions don't make sense. It's the law that lets Grey and the creditor committee make the decisions, not the management.

 

One could argue that management violated its fiduciary duties prior to Ch. 11. That doesn't change the outcome of what happens from here out. One could sue the management as I said earlier, but that's about it.

 

In general, one lesson here, we all could be better investors if we thought like credit analysts rather than equity analysts.