Distressed Debt: Petroplus and Guarantor Structures

(Update: Wrote this last night. 3 people emailed me after saying I was missing a great short term trade. They were right. Bonds up 8 points on news that Company reached a temporary agreement with lenders for liquidity and a possible agreement with a third party for supply of crude for Croyton and Ingolstadt)

Yesterday, I mentioned that one of the ways I find distressed debt ideas to research is via the price action.  Here is a chart of Petroplus' 7% bond due 2017:

In the painfully slow, last week of the 2011, Petroplus ("the Company") announced that its revolving credit lenders froze approximately $1 billion of uncommitted lines under its revolving credit facility.  Bonds dropped 10 points from 60 to 50 on the news.  News started to trickle out that the company would need to shut down some of its refineries as the lack of liquidity would make it impossible to source crude for its refining operations. The company was downgraded by both S&P and Moody's, with both rating agencies citing near-term liquidity risks at Petroplus.

The Company announced that it was continuing negotiations with its revolver lenders, and that it would commence a temporary shutdown at three of its five oil refineries.  Then, on January 5th stated this in a press release:

"The Company also announced that access to all of its credit lines under the Revolving Credit Facility has been suspended and access to its pledged bank accounts with its Revolving Credit Facility lenders has been restricted, pending the outcome of the negotiations with the RCF lenders."
Bonds dropped another ten points on the news.  Press reports indicate that since then, Petroplus has hired four financial advisors (including Rothschild), and bank lenders have also hired counsel and an FA to assist in the ongoing issues at the Company. 

Stepping back just a bit, Petroplus is one of the largest refiners in Europe.  They own 5 refineries:
  • Coryton Refinery in the UK
  • Antwerp Refinery in Belgium
  • Petit Couronne Refinery in France
  • Ingolstadt Refinery in Germany
  • Cressier Refinery in Switzerland
According to the Company, these refineries have a combined capacity of approximately 667,000 barrels of crude per day. In its announcement stating that all its credit lines have been suspended, the Company noted that two of the five refineries are being shut down, one is expected to run out of crude in the next week, and that the two remaining (Ingolstadt and Coryton) are running at lower than normal capacities. Without liquidity, Petroplus cannot purchase its raw material (crude) to process into refined products.

Complicating this situation further are three salient points:
  1. If the company does indeed file for bankruptcy, it may be quite messy given the multi-jurisdictional issues related to a European restructuring
  2. Europe is almost certainly going to be in a recession meaning the demand for refined products will be lower, pushing prices down, while the price of crude may continue to move higher pushing the crack spread to very low and possibly negative levels
  3. The guarantor structure, while on the surface looks reasonable, is actually very questionable
Let's take point #3 and examine it a little closer.  For reference, you can find the documentation for the four publicly traded bonds here: Petroplus Bond Documentation.  The Company issues its 4 bonds out of a finco "Petroplus Finance Limited." Here is the org chart according to the 9.375% OM:

According to the 9.375% Indenture, the Guarantors are defined as:
  • the Company (Petroplus Holding AG)
  • PRML (Petroplus Refining and Marketed Limited which owns the Coryton facility)
  • PPI (Petroplus International BV)
  • Petroplus France (Petroplus Holdings France SAS which owns the Petit Couronne and Reichstett refineries, but through subsidiaries)
  • Petroplus Bermuda (or Petroplus Finance 2 Limited)
This is where things get very tricky.  Reading further in the OM, you get this:

As of the Completion Date, the Senior Guarantors will consist of the Company, PRML, PPI, Petroplus France and Petroplus Bermuda.
  • The Company is the parent company of the Petroplus group and holds, directly or indirectly, the Capital Stock of all of its Restricted Subsidiaries and does not conduct any revenue-generating operations.
  • PPI is a first-tier intermediate holding company.
  • PRML directly owns and operates the Coryton refinery; directly owns the Capital Stock of Petroplus Refining Teesside Limited, which own and operates the Teeside refinery; directly owns the Capital Stock of Petroplus Marketing Limited, which engages in commercial activities with respect to the Coryton and Teesside refineries.
  • Petroplus France directly owns the Capital Stock of (a) Petroplus Raffinage Reichstett SAS, which owns and operates the Reichstett refinery, (b) Petroplus Raffinage Petit-Couronne, which owns and operates the Petit-Couronne refinery and (c) Petroplus Marketing France SAS, which engages in commercial activities for the Reichstett and Petit-Couronne refineries.
  • Petroplus Bermuda is a finance company and does not engage in, or generate any revenues from, refinery operations.
My emphasis added.  While Petroplus France (more specifically Petroplus Holdings France SAS) is a holding company owning the stock of the Reichestett refinery and the Petit-Couronne refinery (via Petroplus Raffinage Reichstett SAS and Petroplus Raffinage Petit-Couronne, respectively) , the liabilities at those entities would come ahead of you in a recovery.  You would be left with the residual value (asset - liabilities) which would then flow up to through the recovery waterfall.  From my estimation, the only refinery in this structure in which you have a real hand in the recovery is the Coryton refinery.  I have yet to find a good break out of liabilities and am still working on building that from the ground up.  Here is an asset / revenue breakdown from the 2010 annual report:

And here is a break-down of the currency break-down of trade payables (not sure how helpful this is):

In addition, the 9.375% OM states:
"Following the assumption of the obligations under the Notes by Petroplus Finance Limited and the release of the proceeds of the Offering from escrow, the Notes, the New Convertible Bonds and the Existing Senior Notes will be secured (equally and ratably) by the following collateral: (a) intercompany loans made by Petroplus Finance Limited to Petroplus International B.V. and Petroplus Holdings France SAS in an aggregate amount equal to (i) the aggregate principal amount of the New Convertible Bonds ($150 million) and (ii) the aggregate principal amount of the Notes, (b) an intercompany loan made by Petroplus Finance Limited to Petroplus International B.V. in the amount of $1.2 billion, (c) intercompany loans outstanding to Petroplus Marketing AG of no less than $1.0 billion and (d) a pledge of all the shares of the Petroplus Finance Limited."
This disclosure brings up all sorts of "double dip" issues that frankly, I have yet to wrap my arms around yet.

This is the first of probably many posts on Petroplus that I will share with you as the situation unfolds. Right now my initial inclination is stay on the sidelines despite my belief that an asset like Coryton is a pretty darn good one.  To me, the company is going to need a lot of capital to restart its operations (or convert its operations to storage) and purchase crude (i.e. priming risk), the situation in Europe is not conducive to expanding crack spreads (though the closing of the Petroplus refineries will surely help their competitors), and the suspect guarantor structure, among other things.  I am still sharpening my pencil on this one and would love to hear if you are working on it.  


Anonymous,  1/11/2012  

Great, in depth analysis. I really enjoy reading it to get an appreciation for what you really need to do to be successful in distressed debt investing.

Anonymous,  1/18/2012  

Very interseting analysis. I look forward reading as thing unravel


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.