The financing for the deal includes a $155 million term loan, $125 million in junior debt and an initial rights offering of approximately $140 million. The Ross-led group also bid $482 million face amount of second-lien bonds. The bank loan is currently in the process of being syndicated by UBS.
Bumpy Ride
But the issuance of an additional $3.75 million in equity generated controversy among second-lien holders who claimed Ross was taking significantly undervalued equity in the company in lieu of a $3.75 million cash fee. At the time, two separate letters from Third Point Capital and JANA Partners claimed the financier has agreed to take cash, not equity, for arranging $125 million in junior debt for Horizon's acquisition.
According to Ross, ICG needed additional capital and its management, for timing reasons, decided to take the $3.75 payment in stock without going through the rights issue process. However, due to expenses generated during the bankruptcy process, Ross and his group decided to raise an additional $6.25 million in equity through a rights offering open to the remaining second-lien holders. According to Ross, the new issuance will offer its subscribers more money in the company without diluting ownership in ICG. "So it's much ado about nothing," he noted.
A source familiar with the second-lien holders said Ross and the ad-hoc committee will still receive their $3.75 million fee in cash, but the additional $6.75 million will allow the rest of the second-lien holders to participate pro rata.
Picking A Bank
ICG's longstanding borrowing relationship with UBS led ICG to tap the bank for the $768 million acquisition of Horizon Natural Resources. "When we did the financing for our steel company [International Steel Group] we invited a number of lenders to make proposals," Ross said. "UBS came up with the best proposal and since we know them very well and they have a great deal of coal expertise, we used them as lead arranger."
Ross said the U.S. has more energy in British thermal units (Btus) of coal than all the Arab countries have in Btus of oil. "[This] is very good both from a balance of payments point of view and a security point of view because we do not have to depend on countries that are unstable politically for coal," he added.
Ross also plans to increase the rhythm of extraction to reduce the life of the reserves in ICG mines to less than 80 years. "We believe that the total reserves in ICG are approximately one billion tons," he noted, adding only about 12.5 million tons per year are currently being extracted. "At that rate they will have an 80-year supply of coal, but now that the company is capitalized we are going to see if there is a way that we could accelerate the mining of that coal and therefore sell it a lot quicker than over an 80-year period," he stated.
ICG will benefit from rising energy prices. "Coal sort of marches in tandem to other energy sources," Ross noted, adding, it is still the most efficient fuel for the utility to burn.
But even if energy prices would drop, the distressed titan has hedged his risks locking 60% of ICG's current production under long-term contracts to electric utilities. He also said because electric utilities have to make a very large capital investment in their facilities, they like to have a long term supply of coal locked in.