Rare-earths miner Molycorp prepares file bankruptcy protection

Rare-earths miner Molycorp prepares to file for bankruptcy protection

9:55 AM, 7th June 2015
Rare-earths miner Molycorp prepares to file for bankruptcy protection

NEW YORK, US: Molycorp Inc, the only US miner and processor of rare-earths elements, plans to file for chapter 11 bankruptcy protection as soon as this month to cut its $1.7 billion debt load, according to people familiar with the matter, reported WSJ last week.

The Greenwood Village, Colo-based company is completing a plan that would involve senior bondholders exchanging some or all of their debt for ownership of the company, some of the people said. It is exploring options such as an equity sale to junior creditors and shareholders to ensure the company would emerge in sound financial health, they added.

Molycorp is also weighing an offer from the senior bondholders for a loan that would fund its operations during bankruptcy, the people said. Senior lender Oaktree Capital Management LP may also participate in that loan, they added.

The plans aren’t final and could change, the people cautioned. Companies and their advisers sometimes use the threat of bankruptcy to bring creditors and other stakeholders to the negotiating table.

The plan marks a dramatic turn for Molycorp, which rode temporary concerns of a shortage in rare earths elements used in a host of electronic devices to a $6 billion market capitalization in 2011. But since then, China has relaxed restrictions on exports of rare earths, oversupplying a market that is relatively small compared with those of coal or iron ore.

Amid the glut, the company posted a three-year streak of annual losses through 2014. It had $134 million in cash as of March 31, according to a regulatory filing.

Molycorp skipped a $32.5 million bond interest payment due this week, entering a 30-day grace period before a default. In March, it warned it may not be able to continue as a going concern if its debt-restructuring efforts failed.

One of the company’s challenges in completing a restructuring has been avoiding a big payout to Oaktree, the Los Angeles investing firm co-founded by distressed-debt veteran Howard Marks. Molycorp in September closed on a $400 million loan deal with Oaktree, which bought the company time to ramp up production at a mine and processing facility near the California-Nevada border.

But the Oaktree deal came with strings attached, such as the right to a large payment in the event of any prepayment or acceleration of the debt. Creditors have used such rights—known as make-whole provisions—to fight for big premiums in the recent bankruptcy cases of Texas power company Energy Future Holdings Corp and silicone and quartz producer Momentive Performance Materials Inc.

While arguments for such payouts haven’t always worked out for creditors, Oaktree’s make-whole language written while the strategy was at the top of investors’ minds is “state-of-the-art,” according to a note by research firm CRT Capital Group Llc.

As a result, Molycorp has weighed options such as continuing to pay interest on Oaktree’s after the bankruptcy filing and reinstating it upon emergence, in an effort to avoid triggering the payout, according to people familiar with the matter.

© The Wall Street Journal News

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