Shareholders of bankrupt Horsehead Holding who accuse creditors of trying to wipe out their shares in the Robinson-based zinc producer have won the first round of their legal fight.
Judge Christopher Sontchi ordered the appointment of a shareholder committee during a hearing Monday in federal bankruptcy court in Wilmington, Delaware. News accounts of the hearing quote the judge as saying, “Something doesn’t smell right to the court.”
That’s what shareholders have been saying since Horsehead filed for bankruptcy Feb. 2, listing liabilities of $544.7 million and assets of $1 billion. They claim an investor group that purchased controlling interest in Horsehead’s debt is trying to take control of the company at a cut-rate price. The shareholders are trying to stop that by getting a bigger say in the proceedings, which is why they asked the judge to appoint a shareholder committee.
“We are really pleased with the outcome,” said Matthew Peterson of Peterson Capital Management in El Segunda, California.
Mr. Peterson was one of about 60 Horsehead shareholders who attended the hearing.
The shareholders believe an investor group, led by Greywolf Capital Management, a Purchase, New York hedge fund, purchased Horsehead’s debt at a steep discount in order to control the outcome of the bankruptcy. A reorganization plan filed April 13 by Horsehead’s attorneys recommends eliminating the company’s current stock and replacing it with new equity, some of which would be given to the company’s creditors and additional shares they would have the right to purchase.
Creation of an equity committee allows the shareholders to hire their own attorney and financial experts to oppose that plan and offer one of their own.
“Once we have access to the books, we will be able to understand what value truly exists,” Mr. Peterson said.
Whatever plan the court ultimately approves must deal with a nagging issue: Horsehead’s $550 million zinc plant in Mooresboro, N.C.
The plant opened in June 2014 but design and equipment problems prevented it from generating anywhere near the 155,000 tons of zinc annually that it was supposed to produce. The plant was idled in January. According to a court document filed by the company, it will take about three years and $117 million more to bring the plant up to full capacity.
It is common for stockholders to be wiped out when a publicly traded company files for bankruptcy. Horsehead shareholders realize convincing Judge Sontchi is a significant accomplishment, but only the beginning of the difficult task of salvaging some of their investment.
“This is the first step of many,” Mr. Peterson said.
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A sharp decline in plans to repurchase shares reflects Corporate America’s unease about the state of the economy, according to a research firm that tracks stock market data.
Companies announced plans in the first four months of the year to repurchase $228 billion worth of shares, down 36 percent from year-ago levels, according to TrimTabs Investment Research of Sausalito, Calif.
“Even Apple is cutting back,” said TrimTabs CEO David Santschi, noting the company announced that it intends to spend $35 billion on repurchases, down from the $50 billion in buybacks it announced during the first four months of 2015.
Mr. Santschi said the main reason for the drop off is “the economy is not as strong as it was a year ago.”
“Buybacks tend to happen when corporate insiders are feeling flush and they feel comfortable about contributing cash to support their stock-based compensation,” he said.
Because repurchases take shares out of circulation, they tend to boost stock prices because earnings are spread out over fewer shares. That increases earnings per share, a big determinant of stock prices. While some contend companies buy back their shares when they think the market is pricing them below fair value, Mr. Santschi isn’t buying that explanation.
“When they’re feeling flush, they do it. When they’re not, they don’t,” he said.
Mr. Santschi said if the trend continues, it will not be good for stock prices, which tend to go up when buybacks increase and slide when they decline.
“It’s a longer term bad sign for stock prices,” he said.
Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.
First Published: May 9, 2016, 4:00 a.m.
