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Analysis: Valuation in the Spotlight for Horsehead Holding Chapter 11

Valuation has become a contentious issue in the chapter 11 case of Horsehead Holding as some shareholders are alleging that the company’s assets are actually worth more than the company contends, the New York Times reported on Saturday. The company listed $421 million in secured and unsecured debt obligations in its February bankruptcy filing. Like many companies in the commodities business, Horsehead has stumbled. Spot prices for zinc and nickel swooned in 2015, and a new zinc plant it built in Mooresboro, N.C., encountered production problems. Still, metals prices have rebounded significantly since the company filed for bankruptcy. And some Horsehead shareholders contend the company is lowballing the value of its assets to let leading creditors gain control of it at a bargain price. The decline in Horsehead’s assets has certainly been precipitous. Just before the February filing, its assets were valued at $1 billion. Six months later, Horsehead’s financial adviser estimated that the company’s assets were worth about one-third of that. Diane Lourdes Dick, an associate professor of law at Seattle University Law School, said the Horsehead case highlighted a flaw in the bankruptcy process. “What we have here are equity owners that are functionally shut out of the process, and that provides the opportunity for exploitation by other stakeholders,” she said. “It is yet another example of the unique challenges that equity holders face when the company they’ve invested in is in chapter 11.” Read more.

Get additional insights and analysis on valuation topics by picking up a copy of ABI’s A Practical Guide to Bankruptcy Valuation

Aéropostale Loses Bid to Rein in Sycamore

A bankruptcy judge has dealt a big blow to Aéropostale Inc.’s bid to survive chapter 11, refusing to rein in the bidding rights of Sycamore Partners, a former big backer and now major critic of the retailer, the Wall Street Journal reported on Saturday. Bankruptcy Judge Sean Lane, in a decision signed Thursday but not made public until Friday afternoon, said that Sycamore is entitled to wield its $151 million loan as currency at the bankruptcy auction of the retail chain, a credit-bid that gives it an advantage in the competition. The ruling portends bad news for landlords and employees of the teen fashion retailer, which has been at odds with Sycamore since before it filed for bankruptcy protection in May. The private-equity firm has said liquidation may be the best outcome for Aéropostale and its stores, and scoffed at the company’s hope of a job-saving turnaround. The credit-bid means Sycamore can walk into the auction without cash, and demand rival bidders pay off the $151 million loan from Sycamore if they want to save, or liquidate, the company. During arguments, Aéropostale warned that allowing Sycamore to credit-bid makes it unlikely that anyone but liquidators will show up at the auction. Read more. (Subscription required.) 

Need more insight into credit bidding in bankruptcy? Pick up a copy of ABI’s Credit Bidding in Bankruptcy Sales: A Guide for Lenders, Creditors, and Distressed-Debt Investors

Energy Future Wins Court Approval to Exit Bankruptcy

Energy Future Holdings Corp., Texas' biggest power company, won bankruptcy court approval on Friday for a plan that will allow the bulk of its operations to exit chapter 11 after two years of battling creditors, Reuters reported. "I am going to overrule all of the remaining objections,” said Bankruptcy Judge Christopher Sontchi. Dallas-based Energy Future filed for bankruptcy in April 2014 when weak electricity prices left it unable to service $42 billion in debt, mostly related to the company's creation through a 2007 leveraged buyout. The reorganized company will own TXU Energy, the state's largest retail electric utility, and Luminant, Texas' largest power plant operator and largest coal miner. The spinoff of the two divisions into the new company avoids a tax liability that had worried creditors. The potential for a "massive" tax liability was the "elephant in the room," Judge Sontchi said on Friday, adding that he believed the plan "was the best possible deal" to push the company out of bankruptcy.

NextEra Reaches Pact with Lenders on Funding Oncor Buy

NextEra Energy Inc. has reached agreement with financial institutions on its bid to buy Energy Future Holdings Corp.’s Oncor Electric Delivery Co. utility in Texas, Bloomberg News reported today. As part of the transaction, NextEra plans to fund $9.5 billion, primarily for the repayment of about all of the Energy Future Intermediate Holding Company debt, NextEra said today. NextEra has proposed to take over the biggest transmission operator in a state where regulators have already proven they can drive a tough bargain. An investor group led by Dallas-based Hunt Consolidated Inc. tried and failed in May to buy Oncor. At stake is a transaction that’s key to Energy Future’s emergence from one of the biggest bankruptcies of all time, involving the restructuring of about $50 billion in debt. NextEra has previously agreed to buy all of the equity of reorganized Energy Future Holdings and certain of its direct and indirect subsidiaries, including Energy Future Holdings’ approximately 80 percent indirect interest in Oncor.

Treasury, HHS Put Pressure on Lawmakers to Extend EITC to Puerto Rico

Two Obama cabinet officials on Friday said an extension of the Earned Income Tax Credit (EITC) to Puerto Rico is one of the most surefire ways to help the island emerge from its fiscal crisis, reported on Friday. In a letter to members of a congressional task force that’s required to draft a report on the causes and possible solutions to Puerto Rico’s economic issues, Treasury Secretary Jack Lew and Health and Human Services Secretary Sylvia Burwell said that EITC expansion could be part of a toolbox of “proven, bipartisan tools for stimulating economic growth and rewarding work.” In an Aug. 26 letter to the eight-member bipartisan task force led by Sen. Orrin Hatch (R-Utah), Lew and Burwell wrote that “Adopting a locally-administered EITC consistent with the President’s budget proposal would pull 54,000 Puerto Ricans out of poverty and increase Puerto Rico’s Gross National Product by $1.05 billion, or 1.5 percent…. The EITC also can be expected to increase tax compliance and tax revenues, improving Puerto Rico’s fiscal position.” An expansion of the EITC to Puerto Rico’s residents was a key request of Democrats in the efforts to pass PROMESA, the law that set up debt restructuring tools to help San Juan emerge from its debt woes. Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage

PricewaterhouseCoopers Reaches Mid-Trial Deal in Lawsuit by Taylor Bean Trustee

PricewaterhouseCoopers (PwC) has settled a lawsuit accusing the auditing firm of failing to detect the fraud that brought down Taylor, Bean & Whitaker Mortgage Corp. in 2009, a lawyer for the mortgage lender's bankruptcy trustee said on Friday, Reuters reported. The settlement ends a civil trial in Miami-Dade County Circuit Court in Florida in which the trustee had sought more than $5.5 billion in damages from PwC. Terms are confidential, a lawyer for the trustee said. The case stemmed from PwC's auditing work for Montgomery, Ala.-based Colonial BancGroup Inc, where Taylor Bean, among the nation's largest privately held mortgage lenders, was a major customer. The lawsuit accused PwC of missing a massive fraud in which Taylor Bean Chairman Lee Farkas and others hid losses by shuffling money among Colonial accounts and by selling nonexistent or worthless mortgages. Taylor Bean filed for bankruptcy in August 2009. Colonial filed for bankruptcy that same month, days after regulators seized its banking operations. It was the sixth-largest bank failure in U.S. history.