Monday, May 18, 2009

First They Defaulted On Bonds, Now On DIPs

Titanium dioxide maker Tronox, which filed for bankruptcy a mere 5 months ago, has decided to default yet again (this time in the confines of bankruptcy court), this time on its $125 million DIP which was arranged by Credit Suisse. The reason for the default is Tronox' inability to file audited 2008 financial statements on time. A recent filing explains the reason for the default:
Tronox is not presently in compliance with certain covenants and representations in its postpetition debtor-in-possession financing facility credit agreement (as amended, the “DIP Agreement”) because of, among other things, the March 13, 2009 insolvency filing of Tronox’s German subsidiaries under German law and Tronox’s failure to timely provide the DIP Lenders (as defined below) with audited financial statements for the fiscal year ended December 31, 2008 as a result of an ongoing analysis and investigation of the company’s environmental and other contingent reserves. Tronox and its advisors have engaged in extensive, arms’-length negotiations with the DIP Agent and DIP Lenders to waive these defaults and amend the DIP Agreement. These negotiations have been successful.
A DIP amendment and waiver hearing, which was initially scheduled for the 18th has been delayed until the 21st. As for how successful negotiations have been, one shall see in a few days: as the filing continues, there is pretty substantial liquidation risk if even a few holdouts decide to make life for the bankrupt company miserable:
First, the First Amendment will enable Tronox to borrow under the DIP Agreement, which it cannot presently do. Without the ability to borrow, Tronox would face a liquidity crisis before the end of this month which would significantly impair its ability to operate in the ordinary course. Second, the First Amendment will eliminate the serious risks posed to Tronox’s estates by the DIP Lenders’ rights under the DIP Agreement to exercise remedies against Tronox on account of the defaults. These remedies include, among other things, the ability to declare the amounts presently outstanding under the DIP Financing due and payable in full, an act which would likely force Tronox to liquidate.
As green shoots are sprouting and short squeezes are flourishing, companies are now redefaulting while in chapter 11. And this is from a key titanium dioxide maker: the main component of garden variety paint. Speaks volumes about the situation in housing. In fact, Michael Panzner of Financial Armageddon had some very interesting thoughts on the issue of titanium dioxide.

As for Tronox' loan prices: well, the chart below demonstrate just how much of a parallel universe the capital markets are in right now.

The full Tronox filing is presented below:
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