Chemtura Corp is expected to come up with a plan of reorganization in the next three months and emerge from bankruptcy by the middle of 2010. I am proposing a potential plan of reorganization that sees part of the Unsecured Notes reinstated and a 550 mm Exit Facility. In my previous post, I highlighted how the Company needed to generate 2010 EBITDA>270 mm to have equity value. Now, I recognize that the 4.5x multiple used was probably too conservative, therefore with a multiple of 6.00x and with a lower 2010 EBITDA forecast, there can be some equity value.
2009 Developments
Term of the DIP Loan – 250 mm Term Loan, 64 mm Revolving Credit and 86 mm Revolver that will be converted in a Term Loan once the Company exits bankruptcy
DIP Fees – Around 10.5% for the 250 mm Term Loan and 64 mm Revolver; around 6.5% for the 86 mm Revolver. There is a 1.5% unused fee for the unused portion of the Revolving Credit average balance, a 2% exit fee on the 86 mm payable to the lenders and 3% exit fee on all other commitments. The DIP Loan matures in March 18 2010
DIP Term Balance – 165 mm of the Term Loan was used in March to fully terminate the US Receivable Facility and to fund working capital. The remaining 85 mm of the Term Loan was used in April to fund certain outstanding amounts owed to Secured Creditors under the amended 2007 Credit Facility.
Assumptions
Emergence from BK – Before the end of 2010, probably around the 3Q of 2010
PVC additive business – The transaction will generate 45 mm in cash, capital expenditures will be reduced by 18% or 13 mm, which is the percentage of PVC sales to the total segment sales, and EBITDA will be reduced by 10% or 21 mm, which is a percentage of the PVC sales to total sales.
Capital expenditures – The Debtor will incur 45 mm in capital expenditures in 2009 and 2010, which includes a reduction due to the PVC additive business sale. The 8K on February 29 indicated that the company wanted to keep cap ex below 60 mm for 2009.
Working Capital – The Debtor will generate 20 mm in cash from reduction of working capital in 2009 and 30 mm in 2010 due to continuing effort to reduce inventories and account receivables. In 2011 and 2012 working capital requirement will be 20 mm and 40 mm
Potential Plan of Reorganization
Exit Facility – A 550 mm Term Loan with 50 mm amortization schedule each year. The loan will be fully amortized in 11 years.
DIP Loan –The 250 mm Term Loan will be repaid with proceeds from the Exit Facility, cash on hands and cash generated from operations. The 86 mm Revolver will become available as a new line of credit
Credit Facility – The 151 mm balance of the 2007 Credit Facility will be repaid in full using proceeds from the Exit Facility, cash on hands and cash generated from operations.
370 mm Senior Unsecured due 2009 – The Debtor will repurchase them at par plus accrued interest using proceeds from the Exit Facility, cash on hands and cash generated from operations.
500 mm Senior Unsecured due 2016 – The Notes will be reinstated and accrued interest will be paid.
150 mm Debentures due 2026 – The Notes will be converted into a 1.50% coupon mandatory Convertible Note. I assume that 80 mm will be converted in 2011 and the remaining 70 mm in 2012
Capitalization Upon emergence, the Debtor will have a 1,200 mm in debt comprised of a 550 mm Exit Term Loan Facility with an amortization schedule, an 85 mm unused Revolver balance, 500 mm in Unsecured Debt and 150 mm Convertible Note. The latter will be converted into equity by the end of 2012, bringing the debt level down to 950 mm. The end cash level in 2010 will be 116 mm; debt/EBITDA will be 5.4 and 3.2 in 2010 and 2012 respectively. Financial covenants under the Exit Facility should contain a minimum EBITDA of 190 mm per year and a minimum cash balance of 80 mm each month. Now, I am under the impression that the 2016 and 2026 Notes can be reinstated, given the fact that default on these notes was triggered only by cross-default provision included in the indenture governing them, and not by breach of their financial covenants. In order words, the default on the 2016 and 2026 Notes was the result of non-compliance with the covenants under more Senior debt, the Amended Credit Facility. It was likely that the Company couldn’t repay or refinance the 370 mm 2009 Notes due in July; therefore I anticipate that they will be repurchased at par plus accrued interest. Under this scenario I see little equity value in 2010, but can potentially appreciate to 4 dollars a share within one or two years after emergence. I am also attaching a link to an interesting article that I found on another Blog regarding reinstating the Chemtura’s Unsecured debt. Enjoy and I would greatly appreciate your feedback.
http://chemturaresearch.blogspot.com/2010/01/could-chemtura-reinstate-certain-debt.html
Out of topic: the TARP tax
New “TARP Tax” on Banks The Administration has proposed a “Financial Responsibility Fee” that would be levied on banks and other financial institutions with assets exceeding 50 billion. The goal would be to recover the losses and costs associated with the TARP program.
Fee to be based on liabilities The fee would be 15 bps based on the “covered liabilities”, which are assets minus Tier 1 capital, FDIC-insured deposits and insurance liabilities covered by state regulated funds. The logic is that Tier 2 and Tier 3 liabilities serve as a proxy for risk trading activity and that firms engaged in such activities should bear additional costs.
Support The proposal will strike a positive tone from a populist perspective and be politically popular. The Democratic leadership in the House has indicated support for the proposal and it’s too early to speculate where the Senate might stand.
In details The fee would go into effect on June 30 2010 and would last for 10 years. The fee collected would contribute to the overall reduction of the budget deficit. I believe that is the bottom line, the Administration will need to decrease the horrifying budget deficit by increasing taxes to someone, and financial institutions look like the perfect candidate.
Flaws and uncertainties About 50 institutions could be subject to the new tax, including US subsidiaries of foreign firms. The Administration has not yet decided if off-balance sheet liabilities would be eligible to be taxed. So here is what needs to be clarified: If the tax is on only domestic liabilities, then a financial institution could avoid the tax by allocating the liabilities to its foreign subsidiaries or to a foreign SPV (Special Purpose Vehicle). An SPV is an off-balance-sheet liability that is usually created by the parent company for the purpose of selling asset backed securities and securitization purposes. If the tax is on consolidated liabilities, then the Administration has no authority to tax the consolidated liabilities of foreign institutions operating within the US, which means that foreign institutions can avoid the tax while their US competitors cannot.
The reality While the behavior of many major financial institutions or their leaders was unjustifiable, the proposed tax is both designed incorrectly, irrelevant and it makes little economic sense. Moreover, the spin that the tax is intended to recoup the losses banks caused to the TARP is misleading, because the primary sources of those losses to date have been Freddie and Fannie and the automobile companies that are exempted from the tax. There is no justification from the taxpayers’ perspective of excluding them from responsibilities for losses, as well. I guess it would make little sense for the Administration to tax itself. Finally, it should be noted that government support to financial institutions extends far beyond just the TARP. Subsidies have come in the form of access to low-cost funds, through borrowing at subsidized rates utilizing Federal Reserve special programs, from merger assistance, from FDIC deposit and debt guarantees, and from the implicit subsidy inherent in too-big-to fail.