Horsehead Holding Corp. on Tuesday filed for Chapter 11 bankruptcy protection, as we reported earlier. Shares of the company were trading at as much as $20 a share only a few months ago in August 2015, today shares dropped 57% in NYSE trading to $0.11 a share. The stock was a holding of many value investors including Mohnish Pabrai who sold out recently after taking a big loss. Many have been critical of Pabrai’s investment in the company. One twitter user mocked Pabrai who is known to use checklist and use the phrase “heads I win, tails I do not lose much” with the following comment.
- Capital intensive: check
- Highly cyclical: check
- Heavy financial leverage: check
- No competitive advantage: check
- Labor force unionized: check
- Industry subject to heavy regulatory oversight: check
- Company in midst of turnaround: check
- Has the industry benefited from macro tailwinds in last few years (low oil prices, cheap auto loans, etc): check
I cannot believe I found a company that passed all my checklist criteria. I am going to put 50% of my money in this and cannot see how I can lose money.
Heads I win, Tail I
Regarding the future of Horsehead Holding Corp., BizJournals notes:
Horsehead Holding Corp. (Nasdaq: ZINC) filed for Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware. It listed liabilities of $544.7 million and total assets of $1 billion, according to a document filed with the court. Its biggest unsecured claims are a $100 million unsecured convertible note and a $400 million unsecured convertible note, both administered by U.S. Bank National Association, according to a bankruptcy filing. It had about $1 million in cash and applied for permission for $90 million in debtor-in-possession financing.
CRT Capital states in a note to clients:
Horsehead Holding Corp. (“ZINC” the “Company”) and four of its wholly-owned subsidiaries (the “Debtors”) filed for protection from its creditors in Delaware bankruptcy court this morning. The filing was largely anticipated after the Company missed a coupon payment on the 3.8% Convertible Notes due 1/1/16.
As we work through the opening day pleadings a few things stand out. Management has revised upward its estimates of the additional investment and time required to complete Mooresboro. The DIP, as currently proposed,
does not contemplate the roll-up of meaningful amounts of pre-petition debt or the funding of further capex at Mooresboro. Management is targeting an accelerated plan process. All of which confirms our view that Mooresboro, the Company’s primary asset, will be idle when the Company is valued for plan purposes and emerges from bankruptcy. ZINC will have limited, in our view, debt capacity at emergence. We expect most, if not all, of the Company’s pre-petition debt to be converted to equity in the reorganized entity. All of which puts the recovery of the Company’s junior stakeholder in jeopardy. We retain our favorable view of the 10.5s for investors that can hold a private equity for a potentially extended period..
CJS Securities opines:
We are dropping coverage of Horsehead Holding Corp (previously Monitor List). On January 14th we moved coverage to Monitor List and suspended our estimates and rating. This morning, the Company and its’ subsidiaries filed for bankruptcy under Chapter 11. Previously, Horsehead announced it had idled its zinc production plant in Mooresboro, NC and reduced its workforce there to a skeleton crew in an effort to preserve cash. Persistent
production problems which have plagued the start up at Mooresboro, combined with a sharp decline in zinc prices, have increased the Company’s cash burn rate to a point where it is no longer feasible to continue under the current capital structure. Earlier this month, Debtwire (as well as Bloomberg and several other sources) reported that Horsehead missed a $1.8mm coupon payment due on its $100mm 3.8% Convert due July, 2017. The Company has a 30- day grace period to make the payment, should it choose to do so. It was also reported that Horsehead has hired Lazard to explore strategic alternatives and/or financial restructuring.