| Wilbur Ross |
Horizon Natural Resources Co.'s $465 million of term notes have soared 20 points in active trading in the last two weeks to the 54-56 range, and the price is expected to keep on rising. The boost came after Newcoal, a company formed by W.L. Ross & Co., teamed up with the majority owners of Horizon's second-lien term notes to bid $277 million for the bankrupt company, a dealer noted. "Investors like the proposal we put forward," said Wilbur Ross, chairman and ceo of the private-equity fund. Prior to Ross' involvement, the majority holders of the second-lien paper, Contrarian Capital Management, Greenlight Capital, Stark Investments and Varde Partners, put in a bid that was approximately $37 million less and did not have the weight of Ross' involvement. Last week a bankruptcy court approved the new plan which has significant upside potential as coal prices rebound, a source said.
However, a requirement to put up new money for a rights offering has led a number of funds to sell, according to one trader. "[The] hedge funds are trading it. Most of the original lenders are gone," another trader added. Some of the funds are also profit-taking after acquiring the debt in the 20s, said the trader. Meanwhile, buyers of the paper want to own equity in a coal company that can capture current high coal prices and is affiliated with Ross, one of the street's most successful distressed investors. Market participants are now speculating a minimum recovery level of 60, the trader noted. The talk in the market is that a bid of 56 was placed last Wednesday.
Under the plan, a rights offering will be made to noteholders to raise proceeds to fund the asset purchase. The rights offering will require a $125 million equity contribution from the noteholders and Ross. Marcia Page, a partner at Varde, said after the rights offering Ross and the four investors will own more than 50% of Horizon's equity, approximately $140 million. "We might own more if there are people who do not want to buy their rights," she said.
Two years ago Horizon, then known as AEI Resources, faced a liquidity crisis caused by weak demand in the coal industry, increased inventories and an uncompetitive capital structure that led the company to file for bankruptcy twice in the same year (LMW, 11/24). When Horizon first emerged from bankruptcy in May 2002 the company distributed $465 million of senior secured term notes and $450 million of 11.75% notes in exchange for $875 million of pre-petition bank debt with UBS. After the company filed for bankruptcy for the second time more than 50% of the $465 million term notes were acquired by the group of four investors. Investor relations officials at Horizon did not return calls.