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| Wilbur Ross |
Wilbur Ross, chairman and ceo of W.L. Ross & Co. and head of the ad hoc creditors committee for Newcoal, has infuriated a group of lenders by planning to take significantly undervalued equity in the company in lieu of a $3.75 million payment fee. As first reported on LMW's Web site last week, separate letters sent to Ross from Third Point Capital and JANA Partners claim the financier had agreed in Horizon's amended restructuring plan to take cash, not equity, for arranging $125 million in junior debt for Newcoal's acquisition of Horizon Natural Resources. Ross and the ad hoc committee formed a new LLC, Newcoal, to acquire the assets of Horizon Natural Resources. The company is now known as International Coal Group. To obtain the necessary capital for the acquisition, Ross and his team raised $125 million in debt and sold equity in the new company. UBS is leading the $125 million financing. The $125 million financing came together with an approximately $140 million rights offering in which the second-lien holders were offered participation. UBS bankers did not return calls.
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| John Sosnowski |
Every second-lien holder that is not part of the original investment group will have their investment diluted by the issuance of 2.48 million shares to pay Ross' fee, stated John Sosnowski, v.p. of research at The Seaport Group. He said Ross and four investors were entitled to a 3% fee of the principal amount of the debt offering, but Sosnowski said by his reading of the agreement, it is not specified whether the Ross-led group can take cash or equity. Joining Ross in the payout is Contrarian Capital Management, Greenlight Capital, Stark Investments and Varde Partners, the majority owners of Horizon's second-lien notes who have teamed up with Ross to buy Horizon for $786 million. Ross and other members of his firm named in the letter did not return calls seeking comment. Representatives from the other distressed debt firms also did not return calls.
Sosnowski explained that Ross and these funds are getting equity that is worth $18 million at market value, instead of the $3.5 million fee. After participating in the rights offering, the average second-lien noteholder, meanwhile, was going to own 84% in Newcoal. But with this new deal, the second-lien holders are getting diluted by approximately 2%, he added. Third Point owns $37 million of Horizon's second-lien notes and is set to own approximately 6.5% of the company when it emerges from bankruptcy. JANA owns $19 million in the term notes.
Barry Rosenstein, managing partner, and Marc Lehman, partner, at JANA wrote in their letter that they were only informed of the payout on Sept. 21. "The ad hoc committee and WLR Coal will be providing itself with an illegal windfall of approximately $13 million at the expense of its fellow noteholders," the letter states. Officials at JANA declined comment. "It does not violate the law per se but it violates the spirit of the plan," said Lawrence Gottlieb, chair of the bankruptcy group at Kronish Lieb Weiner & Hellman, the law firm representing Jana. The plan does not provide for a $18 million payment, he added. The point is they are getting a security with an arbitrary value.
Meanwhile, Ross' decision to receive equity rather than cash may prompt Third Point to pursue legal action, according to the letter Daniel Loeb, managing director of Loeb, sent to Ross. The Third Point manager called Ross' actions both unfair and inconsistent with the terms agreed upon the plan of reorganization. Loeb declined comment. For copies of the two letters, visit www.loanmarketweek.com. "They don't want to start a major litigation. The best way to resolve this quickly is to get the most entities as possible to say come on Wilbur, do the right thing," Gottlieb noted.
One supporting factor for Ross though is that when he stepped up there was no competing plan on the table. "If they did not participate in the rights offering the second-lien holders would have received their 10% pro rata share in Newcoal and would be extraordinarily diluted," said Sosnowski.