(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."
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
Complicating this situation further are three salient points:
- If the company does indeed file for bankruptcy, it may be quite messy given the multi-jurisdictional issues related to a European restructuring
- 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
- The guarantor structure, while on the surface looks reasonable, is actually very questionable
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)
- 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.
"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."