Oaktree unveils Almatis restructuring plan; slams restructuring fees

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Oaktree Capital outlined its restructuring plan for Almatis last week in a 90-minute meeting with Almatis’s senior lenders at UBS’s London offices, two sources familiar with the matter told Debtwire. The workout scheme from the distressed private equity firm, which owns a 38% blocking stake in the company’s senior debt, will compete directly with a plan jointly proposed in late November by Almatis’ sponsor, Dubai International Capital, and mezzanine lenders.

The US fund highlighted the level of restructuring and advisory fees racked up since the early summer, said the sources. The Germany-based Alumina products group and associated parties have incurred over USD 60m of fees in 2H09, equivalent to 10% recovery on the seniors, equalling the cost of much needed investment in Chinese plant capacity, added a source close to the situation.

The Oaktree plan presents two alternatives: option A offering a higher restructured senior debt quantum and lower equity upside, and option B proposing a higher haircut and a larger equity stake, said all the sources. Both Oaktree schemes would be executed through a pre-packaged bankruptcy filing in US court, as would the Dubai International proposal.

Oaktree touted its management skills during the meeting, and warned of low lender recoveries if the Alumina maker were forced into a contested Chapter 11 valuation process, said the sources. But it remains unclear whether Oaktree will convince the two-thirds majority of lenders it needs for a pre-pack, or whether it could cram down mezzanine lenders in a US court.

To back its argument, the fund previewed findings from Talbot Hughes McKillop (THM), a consultancy Almatis’s management hired to conduct independent analysis of internally generated earnings forecasts.

THM’s 100-page report, shortly to be made available to lenders, suggests normalised EBITDA of USD 49.6m for 2009 compared to latest management forecasts of USD 80m, said the sources. The consultant firm forecasted USD 70m of EBITDA for 2010 and stated that FY10 and FY12 management forecasts carried downside risks of around 15%.

Based on these estimates, Almatis senior lenders under a Chapter 11 process would expect to see just 30% recoveries on approximately USD 660m of senior debt, said the source close. That’s because a US bankruptcy court would be unlikely to sanction more than 4x-5x senior leverage for a restructured debtor, he added.

Equity upside

Oaktree’s plan envisages significantly higher recoveries for senior lenders, noted the sources. Under option A lenders would retain 65% of their debt claim, plus 17.6% of interest recovery. Including an early bird fee of 2.5%, this gives a total recovery of 85%.

Under option B, senior lenders would retain 45% of their debt and get an interest recovery of 8.4%, plus the 2.5% early bird fee, giving a 56% recovery. In addition, option B lenders would receive 100% of the equity. Oaktree has already stated its intention to opt for option B.

Both plans also give senior lenders warrants on a pro-rata basis giving 50% economics above a USD 700m enterprise value threshold. Lenders electing option A would receive par recoveries based on an enterprise value of USD 900m, rising to 107% at USD 1bn, and 121% at USD 1.2bn, noted the sources.

If 60% of senior lenders go for option A and 40% elect option B, the restructured group will have USD 275m of senior debt and USD 125m of junior. Interest margins are yet to be disclosed, but will be made available in Oaktree’s term sheet, which should land on lenders desks by the end of this week.

An early-bird deadline for responses to the restructuring offer has been set for 22 December. If two-thirds lender approval is reached, management will file the company for Chapter 11 on 6 January to implement the transaction. Sponsor Dubai International Capital and mezzanine lenders are not offered anything under the Oaktree proposal, but the door is open for them to submit their own suggestions, said the source close.

Oaktree or DIC

DIC, together with mezzanine lenders, tabled its own proposal on 25 November. The DIC faction argues that Almatis’s entire outstanding USD 650m senior debt load is serviceable from free cashflow following a sharp improvement in business prospects over the last three to four months.

The DIC/mezzanine plan involves a cash out option via a USD 50m debt buyback funded by the sponsor. Following the debt buyback, the remaining senior debt would remain whole, and a USD 25m stand-by revolver would be put in place to fund working capital, sources said previously. Annual interest costs would be around USD 35m - USD 40m. DIC would retain 60% of the equity, the remainder being split between second lien and senior/junior mezzanine holders, which in turn would be fully equitised.

Lenders were due to send in their responses to the sponsor-backed plan by 10 December. This deadline is unlikely to be respected, as there is not enough time for the banking syndicate to assimilate the THM report and the Oaktree proposal, noted the two sources familiar. The next stage is to see Oaktree’s term sheet and arrange a meeting with THM to quiz them on their report, said the first source familiar.

The senior lender co-committee is advised by Rothschild. The company is advised by Close Brothers, Linklaters and Gibson Dunn, and its US arm by Moelis. Mezzanine lenders are advised by Versatus and Freshfields, and the sponsor by UBS.

Almatis senior debt was indicated on Tuesday in the low 70’s. The paper traded as low as the early twenties in June.

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