Howard Marks, the co-founder of Oaktree Capital Group, has experienced hundreds of bankruptcies in his several decades on Wall Street, so it’s not a complete surprise to learn he has outfoxed Leon Black of Apollo Management and other creditors by providing a rescue financing deal in the ongoing Molycorp bankruptcy.
According to the Wall Street Journal, mining firm Molycorp’s bankruptcy will leave credit-investing fund Oaktree Capital Group undamaged while Apollo Global Management and other junior creditors suffer significant losses.
The WSJ sources say Oaktree managed to beat Apollo and other firms to the punch last year in making a deal to provide $400 million in rescue financing to Molycorp. This rescue financing deal allowed Oaktree to negotiate for a safer senior creditor position in a restructuring of the miner’s debt.
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Molycorp made it official on Thursday when it filed for chapter 11 bankruptcy. However, the firm is continuing to pay the high-interest loan from Oaktree as it slashes other parts of its $1.7 billion debt load, based on legal filings. This seniormost debtor treatment comes after aggressive negotiating by Oaktree last summer for terms to give it leverage in Molycorp’s eventual negotiations, according to knowledgeable sources.
Apollo has not publicly released the size of their stake in Molycorp bonds, but according to sources, the investment is relatively small. Of note, Molycorp owes Oaktree about $260 million on the loan, according to court documents.
Apollo is led by junk bond vet Leon Black, and together with Oaktree are the most highly regarded investors in the private debt sector. Analysts point out that investment in this area are high-risk, complex wagers that can land fat profits or lead to painful losses.
These firms have been chasing high-yield distressed investments for years, but in an era of historically low return from “regular” investments, they are now facing stiff competition for deals from other investors. Keep in mind that very low interest rates and relatively calm economic conditions (as well as the big washout of bankruptcies in 2007 and 2008) have minimized the number of distressed firms.
Oaktree and Apollo offered competing financing proposals to Colorado-based Molycorp back in the summer of 2014, and the company decided to go with Marks and Oaktree, leaving Leon Black and Apollo holding the bag.
That said, you can bet your bottom dollar that Apollo’s lawyers are already working on legal action to contest this apparent collusion, and that the matter will ultimately be settled in court.