Capitalizing on its past coal experience, WL Ross & Co. has linked up with Horizon Natural Resources as the stalking horse bidder in the coal miner’s bankruptcy auction. If the firm wins the auction, as expected, it will acquire the business for $225 million in an all cash deal.
Horizon, based in Ashland, Ky., controls coal mining operations in 20 locations, and has a presence in four states, including West Virginia, Kentucky, Illinois and Indiana. The company is one of the leading producers of bituminous (steam) coal, and sells primarily to electric utilities located in the eastern United States. Horizon has been hampered by a heavy debt load, which was brought on by a number of acquisitions made in the late 1990s. In 2002, shortly after emerging from bankruptcy protection, the company filed for bankruptcy again, and has been working on a reorganization plan ever since.
“The [bankruptcy] case has been fairly contentious,” said Wilbur Ross, chief executive and chairman of WL Ross & Co. “The company has a very complicated capital structure and whenever there is that much complexity, there is always the potential for disagreement [among the debtholders].”
He added, “Nobody wants to liquidate the company, so we were brought in as a neutral party to bring the deal together.”
Under the terms of the agreement, WL Ross, through newly formed company, WLR Coal Holdings, will acquire an initial equity stake of 10% in the reorganized company. The firm will join a group a four other investors who own a majority of the second lien notes, and that group will support an offering of equity rights to all noteholders. Following the company’s emergence from bankruptcy, WL Ross will then increase its stake and assume operational and management control of Horizon.
The other second lien note holders include Contrarian Capital Management, Greenlight Capital, Stark Event Trading and Varde Partners, according to sources close to the deal. Deutsche Bank, meanwhile, will be on the receiving end of the transaction, having previously issued a $215 million debtor-in-possession loan to the company.
WL Ross’s arrival came after Stark, a U.S. hedge fund, abandoned a deal in April to provide $300 million in exit funding, according to reports. At that point, it appeared Horizon would be split up and sold off piece by piece.
According to Ross, the new deal has already garnered the support of everyone involved in the negotiations, except AIG, the controlling holder of Horizon’s reclamation bonds. Ross noted, “AIG has tried to terminate the exclusivity component of our deal so that they could file their own plan.”
However, he added, “We’ve been having friendly negotiations with [AIG], and our hope is to complete a binding agreement with them, so we can have everyone on board before the deadline.”
AIG was not contacted by presstime.
The investors need to reach an agreement by June 11, at which time they are scheduled to present the terms of the reorganization to the bankruptcy court.
The Roadmap
If the deal does go through, Ross expects to borrow the blueprint he used in past coal investments to help get Horizon back on its feet. “We’ll take the same approach we used with Anchor Coal,” he said, referring to another coal company in the WL Ross portfolio. “When Anchor came out of bankruptcy we set up an operating company that held onto its liabilities and another company that controlled its reserves.”
Moreover, with Ross at the wheel, he said Horizon would be able to work together with Anchor to cut costs and make its business more efficient. “It won’t actually be a merger, but there will be a lot of rationalization between the two companies, and both will benefit,” he said.
However, even with the cleansing of the Horizon’s debt and the new partnerships, Ross noted that coal investments are often fraught with risk. And even as coal is the cheapest of all the energy sources, the uncertainty in mining the resource can be troubling.
“Coal requires a tolerance for continuous risk,” he said. “Roofs cave in, seams get narrow, it’s not as predictable as drilling for oil, and it requires a certain level of expertise.”
But the space does present significant upside potential, especially considering the unending rise of oil and gas prices. “Coal is the cheapest of all the energy sources on a BTU basis, and the U.S. has more coal reserves than the equivalent of oil reserves in all of OPEC,” Ross said. “We really think the outlook for coal is particularly good for the next couple of years. It’s relatively scarce in other parts of the world such as China and Japan, and many of those countries are industrializing and need coal to do so.”
To make the investment, WL Ross will employ equity from its WL Recovery Fund II. The fund, which has $200 million in committed capital, is expected to be fully invested by September, at which point the firm will begin looking to raise a new fund.
Snapshot
Buyer: WL Ross & Co.
Target: Horizon Natural Resources
Advisors: Debtors: Miller, Buckfire, Lewis, Ying & Co.
Legal Counsel: WL Ross: Jones Day
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