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The US government is leaving no stone unturned in its campaign to squeeze money from the troika of companies on the hook for the Gulf of Mexico oil spill. Creditors to bankrupt titanium dioxide manufacturer Tronox fell prey to that campaign this week when the company disclosed Treasury wants post-bankruptcy equity in the spun-off assets of an Anadarko Petroleum subsidiary.

Aside from hammering Tronox’s bonds with the threat of dilution a-la Chrysler, the revelation implies that the US government is actively hedging against the risk that Anadarko will founder under its spill-related liability, said two investors involved in the restructuring.

That clashes with the significant reduction in the price traders place on Anadarko credit risk over the past week. Five-year credit default swaps referencing the exploration company tightened 100bps this week and traded at 549bps today following Anadarko’s defiant refusal to pay BP for spill-related clean-up.

Tronox filed a plan of reorganization (POR) on 7 July that raises the possibility of giving the US government a hefty equity stake in a reorganized company, according to court filings. The POR discloses a request by the government for the post-bankruptcy equity to address environmental claims asserted by the Environmental Protection Agency (EPA).

The agency agreed last year to settle with Tronox in exchange for USD 115m cash and 88% of any future awards from litigation against the Anadarko Petroleum, the parent of Tronox’s former owner, Kerr-McGee. But now that Anadarko finds itself embroiled in a financial maelstrom, the government has reconsidered.

As part of the proposal, the government would receive USD 165m in cash, USD 130m in 15% perpetual preferred stock convertible into 7.2% of the common equity, warrants for an additional 16% equity stake plus an 88% interest in a litigation trust related to Tronox’s avoidance action against Anadarko.

The Anadarko litigation is based on a fraudulent conveyance motion filed by the debtor against Kerr-McGee, a subsidiary of Anadarko that had spun off Tronox in 2006 along with a cesspool of environmental liabilities.

The government’s environmental claims have always been the lynchpin – and wild card – to Tronox’s restructuring. But when the Macondo well blew up on 20 April, Anadarko’s own future has darkened and the government shifted its sites back to Tronox itself, said two of the bond holders.

Exactly one month after the spill began, the US government approached Tronox with a revised settlement proposal demanding USD 275m in cash upfront and the two sides have been negotiating ever since, according to court documents. “On the heels of BP, it looks like the government is getting more aggressive trying to get value on something related to the environment claims,” said one of the investors.

Tronox’s USD 350m 9.5% unsecured notes due 2012 tanked to 71 this morning before rebounding to 78, still down 15% from the 92 level they traded at before the POR filing, according to MarketAxess. Roughly USD 87m of the bonds changed hands over the past two days, according to the pricing service.

Bond holders are expected to hold 100% of the new common stock on re-emergence, but the government would be poised to capture upside in the restructured company through its equity options, said the two bond holders. According to the POR, the government’s interest in new Tranche A warrants will convert into 7.8% of the equity if the EV grows to USD 1bn; while its New Tranche B warrants will swap into 7.9% of the common stock if the EV grows to USD 1.2bn.

Under the plan, equity holders will receive tranche C warrants that are convertible into 5% of the common stock once the EV reaches USD 1.2bn. The common stock took a beating today, trading down 30% to USD 0.25 on the news.


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