ZINC - Horsehead Holding Corp

[BG2008]

Guys,

 

I traffic in bankruptcy and distressed situations. Although in the last 2-3 years, there's been nothing to do in that space except for commodities.  There are a few truism of distressed investing. 

 

1) It's a small pie and there's not enough to go around for everyone - Someone is going to be unhappy, very unhappy

2) It's a gun fight - don't expect people to be nice

3) Creditors need protection as well.  Creditors have capped upside unlike equity investors.  In return for their limited upside, they have more protection when things go wrong such as covenants, defaults, that provides them the ability to wrestle control away from management.  Think how many times an undervalued situation became a value trap because management made bad capital allocation decisions.  The covenants are pre-negotiated to protect the debt holders.  In my opinion, as long as the debt holders follow the technicality of the debt agreement, he's not violating his rights.  During boom times, debt holders tend to agree to covenant lite terms.  The stakeholders are doing exactly what they are doing, exercising their rights.  We live in a country where these capital market rules and case law precedents help capital to flow to where it is needed and can earn a rate of return.  I can't stress enough how the selfish interest of each stakeholder class is quite important for elevating the standard of living as a whole.  If bankruptcy judges can randomly impair particular stake holders at will, this will lead to lack of a faith in the capital markets.  Ask some third world countries what that's like. 

4) Horsehead WAS NOT a healthy company when it filed.  It was burning a prodigious amount of cash.  The enterprise was not generating cash.  It needed an $80mm DIP loan.  Even at $1/lb of Zinc price, it was not a healthy company due to the severe operational issues facing its plant.  Here's a mental model for you.  If you plot out the graph of the McNulty curve, it is implying that the Moorseboro plant will never achieve 50-60% of capacity.  What McNulty curve?  Google it!  I've looked into the science a bit.  There is a scenario where if the plant was designed wrong, the economics will never work rendering the whole plant useless.  Also, if it can't be fixed in close to 2 years, it probably can't be fixed if you throw another $100mm and 2 more years at it. 

5) Judges need to be mindful of the long term staying power of the enterprise.  What a judge doesn't want is for a company to exit bankruptcy and then return within 3 years.  Thus maximizing value for everyone without a high degree of certainly of the value can be the wrong approach. 

6) I understand that a lot of people lost a ton of money in this investment.  I feel sorry.  I've made mistakes in my career. But I wake up and look at the mirror and blame the guy looking back at me.  I overlooked a red flag, I didn't fully understand the situation, etc.  It is my fault to not catch those.  It is not because the debt holder is trying to steal the company away from me.  Of course, they're trying to get the best economic for themselves. 

 

Horsehead has a way of sucking up way too much of our time.  RIP. 

[rishig]

Guys,

 

I traffic in bankruptcy and distressed situations. Although in the last 2-3 years, there's been nothing to do in that space except for commodities.  There are a few truism of distressed investing. 

 

1) It's a small pie and there's not enough to go around for everyone - Someone is going to be unhappy, very unhappy

2) It's a gun fight - don't expect people to be nice

3) Creditors need protection as well.  Creditors have capped upside unlike equity investors.  In return for their limited upside, they have more protection when things go wrong such as covenants, defaults, that provides them the ability to wrestle control away from management.  Think how many times an undervalued situation became a value trap because management made bad capital allocation decisions.  The covenants are pre-negotiated to protect the debt holders.  In my opinion, as long as the debt holders follow the technicality of the debt agreement, he's not violating his rights.  During boom times, debt holders tend to agree to covenant lite terms.  The stakeholders are doing exactly what they are doing, exercising their rights.  We live in a country where these capital market rules and case law precedents help capital to flow to where it is needed and can earn a rate of return.  I can't stress enough how the selfish interest of each stakeholder class is quite important for elevating the standard of living as a whole.  If bankruptcy judges can randomly impair particular stake holders at will, this will lead to lack of a faith in the capital markets.  Ask some third world countries what that's like. 

4) Horsehead WAS NOT a healthy company when it filed.  It was burning a prodigious amount of cash.  The enterprise was not generating cash.  It needed an $80mm DIP loan.  Even at $1/lb of Zinc price, it was not a healthy company due to the severe operational issues facing its plant.  Here's a mental model for you.  If you plot out the graph of the McNulty curve, it is implying that the Moorseboro plant will never achieve 50-60% of capacity.  What McNulty curve?  Google it!  I've looked into the science a bit.  There is a scenario where if the plant was designed wrong, the economics will never work rendering the whole plant useless.  Also, if it can't be fixed in close to 2 years, it probably can't be fixed if you throw another $100mm and 2 more years at it. 

5) Judges need to be mindful of the long term staying power of the enterprise.  What a judge doesn't want is for a company to exit bankruptcy and then return within 3 years.  Thus maximizing value for everyone without a high degree of certainly of the value can be the wrong approach. 

6) I understand that a lot of people lost a ton of money in this investment.  I feel sorry.  I've made mistakes in my career. But I wake up and look at the mirror and blame the guy looking back at me.  I overlooked a red flag, I didn't fully understand the situation, etc.  It is my fault to not catch those.  It is not because the debt holder is trying to steal the company away from me.  Of course, they're trying to get the best economic for themselves. 

 

Horsehead has a way of sucking up way too much of our time.  RIP.

 

+1.

[merkhet]

Guys,

 

I traffic in bankruptcy and distressed situations. Although in the last 2-3 years, there's been nothing to do in that space except for commodities.  There are a few truism of distressed investing. 

 

1) It's a small pie and there's not enough to go around for everyone - Someone is going to be unhappy, very unhappy

2) It's a gun fight - don't expect people to be nice

3) Creditors need protection as well.  Creditors have capped upside unlike equity investors.  In return for their limited upside, they have more protection when things go wrong such as covenants, defaults, that provides them the ability to wrestle control away from management.  Think how many times an undervalued situation became a value trap because management made bad capital allocation decisions.  The covenants are pre-negotiated to protect the debt holders.  In my opinion, as long as the debt holders follow the technicality of the debt agreement, he's not violating his rights.  During boom times, debt holders tend to agree to covenant lite terms.  The stakeholders are doing exactly what they are doing, exercising their rights.  We live in a country where these capital market rules and case law precedents help capital to flow to where it is needed and can earn a rate of return.  I can't stress enough how the selfish interest of each stakeholder class is quite important for elevating the standard of living as a whole.  If bankruptcy judges can randomly impair particular stake holders at will, this will lead to lack of a faith in the capital markets.  Ask some third world countries what that's like. 

4) Horsehead WAS NOT a healthy company when it filed.  It was burning a prodigious amount of cash.  The enterprise was not generating cash.  It needed an $80mm DIP loan.  Even at $1/lb of Zinc price, it was not a healthy company due to the severe operational issues facing its plant.  Here's a mental model for you.  If you plot out the graph of the McNulty curve, it is implying that the Moorseboro plant will never achieve 50-60% of capacity.  What McNulty curve?  Google it!  I've looked into the science a bit.  There is a scenario where if the plant was designed wrong, the economics will never work rendering the whole plant useless.  Also, if it can't be fixed in close to 2 years, it probably can't be fixed if you throw another $100mm and 2 more years at it. 

5) Judges need to be mindful of the long term staying power of the enterprise.  What a judge doesn't want is for a company to exit bankruptcy and then return within 3 years.  Thus maximizing value for everyone without a high degree of certainly of the value can be the wrong approach. 

6) I understand that a lot of people lost a ton of money in this investment.  I feel sorry.  I've made mistakes in my career. But I wake up and look at the mirror and blame the guy looking back at me.  I overlooked a red flag, I didn't fully understand the situation, etc.  It is my fault to not catch those.  It is not because the debt holder is trying to steal the company away from me.  Of course, they're trying to get the best economic for themselves. 

 

Horsehead has a way of sucking up way too much of our time.  RIP.

 

+1

[arcube]

Guys,

 

I traffic in bankruptcy and distressed situations. Although in the last 2-3 years, there's been nothing to do in that space except for commodities.  There are a few truism of distressed investing. 

 

1) It's a small pie and there's not enough to go around for everyone - Someone is going to be unhappy, very unhappy

2) It's a gun fight - don't expect people to be nice

3) Creditors need protection as well.  Creditors have capped upside unlike equity investors.  In return for their limited upside, they have more protection when things go wrong such as covenants, defaults, that provides them the ability to wrestle control away from management.  Think how many times an undervalued situation became a value trap because management made bad capital allocation decisions.  The covenants are pre-negotiated to protect the debt holders.  In my opinion, as long as the debt holders follow the technicality of the debt agreement, he's not violating his rights.  During boom times, debt holders tend to agree to covenant lite terms.  The stakeholders are doing exactly what they are doing, exercising their rights.  We live in a country where these capital market rules and case law precedents help capital to flow to where it is needed and can earn a rate of return.  I can't stress enough how the selfish interest of each stakeholder class is quite important for elevating the standard of living as a whole.  If bankruptcy judges can randomly impair particular stake holders at will, this will lead to lack of a faith in the capital markets.  Ask some third world countries what that's like. 

4) [b]Horsehead WAS NOT a healthy company when it filed.  It was burning a prodigious amount of cash.  The enterprise was not generating cash.  It needed an $80mm DIP loan.  Even at $1/lb of Zinc price, it was not a healthy company due to the severe operational issues facing its plant.  Here's a mental model for you.  If you plot out the graph of the McNulty curve, it is implying that the Moorseboro plant will never achieve 50-60% of capacity.  What McNulty curve?  Google it!  I've looked into the science a bit.  There is a scenario where if the plant was designed wrong, the economics will never work rendering the whole plant useless.  Also, if it can't be fixed in close to 2 years, it probably can't be fixed if you throw another $100mm and 2 more years at it. 

5) Judges need to be mindful of the long term staying power of the enterprise.  What a judge doesn't want is for a company to exit bankruptcy and then return within 3 years.  Thus maximizing value for everyone without a high degree of certainly of the value can be the wrong approach. 

6) I understand that a lot of people lost a ton of money in this investment.  I feel sorry.  I've made mistakes in my career. But I wake up and look at the mirror and blame the guy looking back at me.  I overlooked a red flag, I didn't fully understand the situation, etc.  It is my fault to not catch those.  It is not because the debt holder is trying to steal the company away from me.  Of course, they're trying to get the best economic for themselves. 

 

Horsehead has a way of sucking up way too much of our time.  RIP.

 

Great post. I would also add that anybody who thinks that the creditors life is going to be easy post the so called steal and conversion to a equity owner does not understand the nature of these complex undertakings. For all we know this can be an albatross around their neck for the next few years.

[Guest roark33]

I hate to be brutally honest, but reading Spier's letter to the bankruptcy court where he says, "Moreover, in his annual letters, the Chairman of Berkshire Hathaway, Warren Buffett, tells his shareholders to look to book value as a guide to the value of Berkshire."

 

This line from Spier in connection with any valuation of ZINC should discount any future comments from Spier, out of hand.  It has to be one of the most ridiculous comments I have ever heard from someone who actually invests real money.

[randomep]

 

 

Guy Spier thinks that the management gave inside information that allowed institutional investors to dump shares to the poor retail investor in the final few months.  That is a pretty strong charge..... but does that include his buddy Pabrai, who had 20% of outstanding stock?  I guess not because Pabrai got screwed to?

 

[LC]

I hate to be brutally honest, but reading Spier's letter to the bankruptcy court where he says, "Moreover, in his annual letters, the Chairman of Berkshire Hathaway, Warren Buffett, tells his shareholders to look to book value as a guide to the value of Berkshire."

 

This line from Spier in connection with any valuation of ZINC should discount any future comments from Spier, out of hand.  It has to be one of the most ridiculous comments I have ever heard from someone who actually invests real money.

 

Seriously? I hope that is taken out of context because that is some sorry ass shit IMHO.

[Green King]

He is just trying to get his piece of the pie. It's all part of the game. You can't fault someone for trying. 

[Green King]

Guys,

 

I traffic in bankruptcy and distressed situations. Although in the last 2-3 years, there's been nothing to do in that space except for commodities.  There are a few truism of distressed investing. 

 

1) It's a small pie and there's not enough to go around for everyone - Someone is going to be unhappy, very unhappy

2) It's a gun fight - don't expect people to be nice

3) Creditors need protection as well.  Creditors have capped upside unlike equity investors.  In return for their limited upside, they have more protection when things go wrong such as covenants, defaults, that provides them the ability to wrestle control away from management.  Think how many times an undervalued situation became a value trap because management made bad capital allocation decisions.  The covenants are pre-negotiated to protect the debt holders.  In my opinion, as long as the debt holders follow the technicality of the debt agreement, he's not violating his rights.  During boom times, debt holders tend to agree to covenant lite terms.  The stakeholders are doing exactly what they are doing, exercising their rights.  We live in a country where these capital market rules and case law precedents help capital to flow to where it is needed and can earn a rate of return.  I can't stress enough how the selfish interest of each stakeholder class is quite important for elevating the standard of living as a whole.  If bankruptcy judges can randomly impair particular stake holders at will, this will lead to lack of a faith in the capital markets.  Ask some third world countries what that's like. 

4) Horsehead WAS NOT a healthy company when it filed.  It was burning a prodigious amount of cash.  The enterprise was not generating cash.  It needed an $80mm DIP loan.  Even at $1/lb of Zinc price, it was not a healthy company due to the severe operational issues facing its plant.  Here's a mental model for you.  If you plot out the graph of the McNulty curve, it is implying that the Moorseboro plant will never achieve 50-60% of capacity.  What McNulty curve?  Google it!  I've looked into the science a bit.  There is a scenario where if the plant was designed wrong, the economics will never work rendering the whole plant useless.  Also, if it can't be fixed in close to 2 years, it probably can't be fixed if you throw another $100mm and 2 more years at it. 

5) Judges need to be mindful of the long term staying power of the enterprise.  What a judge doesn't want is for a company to exit bankruptcy and then return within 3 years.  Thus maximizing value for everyone without a high degree of certainly of the value can be the wrong approach. 

6) I understand that a lot of people lost a ton of money in this investment.  I feel sorry.  I've made mistakes in my career. But I wake up and look at the mirror and blame the guy looking back at me.  I overlooked a red flag, I didn't fully understand the situation, etc.  It is my fault to not catch those.  It is not because the debt holder is trying to steal the company away from me.  Of course, they're trying to get the best economic for themselves. 

 

Horsehead has a way of sucking up way too much of our time.  RIP.

+1

[LC]

He is just trying to get his piece of the pie. It's all part of the game. You can't fault someone for trying.

I don't knock him for trying I knock him for that weak argument

[Picasso]

Yeah that argument was pretty bad.  I thought it was the remake of Butch Cassidy and the Sundance Kid.

 

[RadMan24]

Meh. Why not go through all steps to get an equity committee?

 

Maybe he wanted to put pressure to try and get something, even if its a warrant on the company post-bankruptcy.

 

Arguing that it is worth $500+ million doesn't mean it comes out of bankruptcy valued at $500 million. Debt holders can takeover with a $300 million valuation, while equity holders get a warrant that becomes equity when it reaches $400-500 million in valuation, allowing the to participate in the upside while not affecting total capital structure for the worse.

 

That would sound fair to me. I would still support Guy regardless of what idea he comes up with next along as its rationale is sound.

[Guest notorious546]

http://latticework.com/thoughts-on-horseheads-bankruptcy/

 

[SnarkyPuppy]

This is unconfirmed, but a lot of chatter that the Court granted Spier's motion for an equity committee today

[BlackLab7]

Court Update: Judge Sontchi announced that he had decided to enter an order for an equity committee.  I want to thank Judge Sontchi for giving shareholders a voice in this process and look forward to seeing this process through to the end.  As a side note... Guy Spier, Phil Town and several other shareholders did a fantastic job laying out all the facts today in front of nearly 60 shareholders and 15 - 20 attorneys on the opposing side.  Hats off to all of you!

 

http://www.law360.com/articles/791477/horsehead-equity-holders-granted-ch-11-committee

 

[str8shot]

Court Update: Judge Sontchi announced that he had decided to enter an order for an equity committee.  I want to thank Judge Sontchi for giving shareholders a voice in this process and look forward to seeing this process through to the end.  As a side note... Guy Spier, Phil Town and several other shareholders did a fantastic job laying out all the facts today in front of nearly 60 shareholders and 15 - 20 attorneys on the opposing side.  Hats off to all of you!

 

http://www.law360.com/articles/791477/horsehead-equity-holders-granted-ch-11-committee

 

Thanks BlackLab7. Below is the content from the link above for those without access to law360.com:

 

Law360, Wilmington (May 2, 2016, 7:01 PM ET) -- Equity holders of Horsehead Holding Corp. got their wish Monday when a Delaware bankruptcy judge granted their request for an official committee to represent their interests in the metal processor’s Chapter 11 case, following impassioned pleas from some stockholders.

 

During a hearing in Wilmington, stockholders appearing pro se before U.S Bankruptcy Judge Christopher S. Sontchi made their cases for the appointment of an equity committee in the case, a request that was earlier denied by the U.S. trustee. The stockholders, led by Guy Spier and Phil Town, argued that a new zinc processing facility in North Carolina is worth much more than Horsehead contemplates it is worth in its Chapter 11 plan. To prove the value is there, Spier said that the stockholders need resources to do it.

 

“You’d be sending us into a punching match with Muhammad Ali with one hand tied behind our backs, at the very least,” Spier said of stockholders’ chances in a valuation fight without a committee being appointed.

 

Town, manager of a small hedge fund that owns Horsehead stock, said the valuation the company’s financial advisers have come up with is far below what the company may actually be worth. The $550 million North Carolina plant that was idled in January after months of maintenance and operational issues kept it from reaching its full capacity is the main area of disagreement between the equity holders and the company.

 

Town, Spier and the 250 stockholders who filed joinders to Spier’s motion for an equity committee believe the plant can be restarted and bring Horsehead back to profitability. Horsehead said it would take about $80 million and three years to get the facility back up and running and producing 155,000 tons of zinc per year, its intended capacity. In its Chapter 11 plan, the company lists the plant as having no value.

 

In his argument before the court, Town pointed to an independent valuation assessment by KPMG that surmised the plant could be worth more than $500 million to the company, making Horsehead as a whole worth more than $1 billion.

 

Horsehead attorney Ryan Preston Dahl of Kirkland & Ellis LLP said the KPMG report was flawed because it used outdated data and that a valuation report produced by the company’s financial advisers showed the value of the company at between $255 million and $305 million. He said the equity holders didn’t factor in the investment necessary to restart the plant into their financial outlook. If they did, Dahl argued, they would come to the same conclusion that they would be hundreds of millions of dollars out of the money with no hope of a recovery in the case.

 

“We recognize the hardships that result from a bankruptcy,” Dahl said. “The appointment of an equity committee remains the extraordinary exception and not the rule.”

 

Dahl pointed to case law that has held that it is inappropriate to appoint an equity committee in a case for the sole reason of determining a valuation of a debtor’s business. Judge Sontchi said in his ruling that he may be exposing himself to some scrutiny by allowing the committee in this particular case.

 

“I’m going, frankly, out on a limb here from a standpoint of where the law puts me,” Judge Sontchi said. “To put it bluntly, something doesn’t smell right to the court.”

 

He pointed to the equity holders’ arguments and comments from some of the dozens of supporters who filed joinders to the committee request to bolster his own decision. In the arguments and comments, equity holders said they felt Horsehead executives had misled them about the status of the plant and the company’s liquidity situation. A sudden drop in the company’s trading value near the time of the bankruptcy filing was cause for concern, Judge Sontchi said.

 

“I don’t know what happened,” Judge Sontchi said. “I don’t know if there was inappropriate behavior.”

 

Horsehead Holding Corp. and several subsidiaries filed for bankruptcy protection in February, listing $420.7 million in debt consisting mainly of secured note liabilities. The company pointed to a falling commodities market for zinc and nickel and the issues at the North Carolina plant as the reasons behind its bankruptcy filing.

 

An investor has filed a putative class action suit in Delaware federal court accusing company executives of misrepresenting its liquidity position and the extent and severity of the problems at the North Carolina facility.

 

Horsehead is represented by Laura Davis Jones, James E. O’Neill and Joseph M. Mulvihill of Pachulski Stang Ziehl & Jones LLP, and James H.M. Sprayregen, Patrick J. Nash Jr. and Ryan Preston Dahl of Kirkland & Ellis LLP.

 

Spier and Town appeared pro se.

 

The U.S. trustee is represented by Tim Fox.

 

The case is In re: Horsehead Holding Corp. et al., case number 1:16-bk-10287, in the U.S. Bankruptcy Court for the District of Delaware.

[SnarkyPuppy]

I'm no expert here.  But I find some humor in the fact that the Horsehead attorney was arguing directly against the "owners" (shareholders) of Horsehead.  I'm sure that's just how it goes though

[RadMan24]

Hell yeah.

[Aurelius]

To people who lost money in ZINC!!

I see law firms reminding investors regarding deadline in class action lawsuit.

 

For example this one: http://www.rosenlegal.com/cases-886.html

Rosen Law Firm announces the filing of a class action lawsuit on behalf of purchasers of Horsehead Holding Corp. securities (NASDAQ: ZINC) from May 21, 2014 through February 2, 2016, inclusive (the “Class Period”) resulting from allegations that Horsehead may have issued materially misleading business information to the investing public.

If you purchased shares of Horsehead from May 21, 2014 through February 2, 2016, and would like to join the action, please click "Join This Class Action" above.

 

I've sent an email to one of these law firms and I am now waiting for reply. Just wondering how fellow board members that lost money are proceeding? Are you required to be "active" to participate in potential recoveries of losses or ...?

 

Would appreciate hearing from someone as I know next to nothing how these things are sorted out.

[Ballinvarosig Investors]

Can anyone with Bloomberg give a quote of the unsecured? Last I read, it was trading in single digits and if it's still that way, then equity holders may as well be pissing into the wind.

[nikhil25]

+1

 

To people who lost money in ZINC!!

I see law firms reminding investors regarding deadline in class action lawsuit.

 

For example this one: http://www.rosenlegal.com/cases-886.html

Rosen Law Firm announces the filing of a class action lawsuit on behalf of purchasers of Horsehead Holding Corp. securities (NASDAQ: ZINC) from May 21, 2014 through February 2, 2016, inclusive (the “Class Period”) resulting from allegations that Horsehead may have issued materially misleading business information to the investing public.

If you purchased shares of Horsehead from May 21, 2014 through February 2, 2016, and would like to join the action, please click "Join This Class Action" above.

 

 

I've sent an email to one of these law firms and I am now waiting for reply. Just wondering how fellow board members that lost money are proceeding? Are you required to be "active" to participate in potential recoveries of losses or ...?

 

Would appreciate hearing from someone as I know next to nothing how these things are sorted out.

[Jurgis]

Regarding class actions, you don't need to email anyone, you don't need to join the lawsuits at this point in time. The lawsuits will go ahead anyway and you will get whatever they manage to squeeze out of the company. At some point in the (distant) future, you will get a form that will tell you that settlement has been reached, you need to provide info and you'll get couple bucks back.

 

Disclaimer: Not a ZINC holder, not a lawyer. Have had stocks with class actions and received various settlements through years.

[brker_guy]

 

 

http://www.telegraph.co.uk/business/2016/05/18/america-slaps-522pc-trade-duty-on-imports-of-subsidised-chinese/

 

 

[mateo999]

Can anyone with Bloomberg give a quote of the unsecured? Last I read, it was trading in single digits and if it's still that way, then equity holders may as well be pissing into the wind.

 

The 175mm of 10.5% 6/17 has bid/ask of 55.5/57.5 according to my BBrg.  I can't tell how stale this is.  I'm not picking up any actual trades.

[odin]

The last trade in the converts occurred earlier this month at 4 pennies. 

 

You don't see trades in the other bonds as they have been closely held by the same few firms for years.