WILMINGTON, Del. (Reuters) – Horsehead Holding Corp was cleared to exit bankruptcy on Friday although a U.S. judge acknowledged that allegations by the zinc producer’s shareholders that their investment was being unfairly wiped out came very close to derailing the company’s plan.
Horsehead can now proceed with its plan that will eliminate most of its $427 million in pre-bankruptcy debt, cancel its stock and allow the company to emerge from Chapter 11 under the control of its noteholders, led by Greywolf Capital Management.
Shares in Pittsburgh-based Horsehead plummeted 91 percent to close at 4 cents in over-the-counter trading.
“This was one of the most difficult decisions in my 10 years on the bench,” U.S. Bankruptcy Judge Christopher Sontchi said at a hearing in Wilmington, Delaware.
Bankrupt companies generally present plans to a judge with support from major parties in a case. Horsehead had to defend its plan during a three-day trial against allegations by an official equity committee that noteholders were enriching themselves at shareholders’ expense.
The shareholders attacked a valuation by the Lazard investment bank and argued that Horsehead was a “loan-to-own” play by secured noteholders, who bought the company’s debt at a discount and then provided a bankruptcy loan with strict provisions.
Sontchi said the noteholders “shot themselves in the foot” by including a “no-shop” provision in the bankruptcy loan. Without it, the company could have tested its value with an auction and avoided this week’s trial that largely turned on experts’ competing views of valuation.
Sontchi said that the evidence showed the company was worth around $650 million, or roughly equal to the claims held by creditors, leaving nothing for stockholders.
“I knew it was long odds,” said Guy Spier, chairman of the equity committee, who said he was grateful that the judge took the rare step of ordering an official equity committee.
Such committees are usually reserved for unsecured creditors and they get funds from the company to hire lawyers and advisers.
Still, Spier said he believed Horsehead would be worth up to $1.5 billion in five years, which would be a windfall for noteholders. “We were not in a position to put the system on trial,” he added.
Shareholders can still pursue a class action against directors that could be worth $50 million.
Horsehead filed for Chapter 11 protection in February after idling its zinc production facility in Mooresboro, North Carolina, amid weak zinc prices.