Molycorp Inc., the only U.S. miner and processor of rare-earths
elements, plans to file for chapter 11 bankruptcy protection as
soon as this month to cut its $1.7 billion debt load, according to
people familiar with the matter.
The Greenwood Village, Colo.-based company is completing a plan
that would involve senior bondholders exchanging some or all of
their debt for ownership of the company, some of the people said.
It is exploring options such as an equity sale to junior creditors
and shareholders to ensure the company would emerge in sound
financial health, they added.
Molycorp is also weighing an offer from the senior bondholders
for a loan that would fund its operations during bankruptcy, the
people said. Senior lender Oaktree Capital Management LP may also
participate in that loan, they added.
The plans aren't final and could change, the people cautioned.
Companies and their advisers sometimes use the threat of bankruptcy
to bring creditors and other stakeholders to the negotiating
table.
The plan marks a dramatic turn for Molycorp, which rode
temporary concerns of a shortage in rare earths--elements used in a
host of electronic devices--to a $6 billion market capitalization
in 2011. But since then, China has relaxed restrictions on exports
of rare earths, oversupplying a market that is relatively small
compared with those of coal or iron ore.
Amid the glut, the company posted a three-year streak of annual
losses through 2014. It had $134 million in cash as of March 31,
according to a regulatory filing.
Molycorp skipped a $32.5 million bond interest payment due this
week, entering a 30-day grace period before a default. In March, it
warned it may not be able to continue as a going concern if its
debt-restructuring efforts failed.
One of the company's challenges in completing a restructuring
has been avoiding a big payout to Oaktree, the Los Angeles
investing firm co-founded by distressed-debt veteran Howard Marks.
Molycorp in September closed on a $400 million loan deal with
Oaktree, which bought the company time to ramp up production at a
mine and processing facility near the California-Nevada border.
But the Oaktree deal came with strings attached, such as the
right to a large payment in the event of any prepayment or
acceleration of the debt. Creditors have used such rights—known as
make-whole provisions—to fight for big premiums in the recent
bankruptcy cases of Texas power company Energy Future Holdings
Corp. and silicone and quartz producer Momentive Performance
Materials Inc.
While arguments for such payouts haven't always worked out for
creditors, Oaktree's make-whole language--written while the
strategy was at the top of investors' minds--is "state-of-the-art,"
according to a note by research firm CRT Capital Group LLC.
As a result, Molycorp has weighed options such as continuing to
pay interest on Oaktree's after the bankruptcy filing and
reinstating it upon emergence, in an effort to avoid triggering the
payout, according to people familiar with the matter.
Write to Matt Jarzemsky at matthew.jarzemsky@wsj.com and John W.
Miller at john.miller@wsj.com
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