Distressed-Debt Funds Face Losses on Nyrstar Restructuring Bet

(Bloomberg) -- Distressed-debt funds are facing losses after a failed effort to take control of metal producer Nyrstar NV.

Holders of 955 million euros ($1.1 billion) of bonds may recover about 50% of face value in a debt restructuring that transfers the company to commodity trader Trafigura Group, according to investors, who asked not to be identified because the terms are private. More than 90% of bond investors agreed to the deal to avoid insolvency, paving the way for a court-led process in the U.K.

Avenue Capital Management, Monarch Alternative Capital and Warwick Capital Partners are among funds that bought the notes last year, hoping to take control and profit from a debt-for- equity swap, people familiar with the matter said. The plan backfired because they underestimated how urgently Nyrstar needed money and how quickly its largest shareholder would stump up the cash in its own bid for control. “Buying Nyrstar notes to take control of the company was a bit of wishful thinking as Trafigura has skin in the game,” said Felix Fischer, global head of research at Lucror Analytics in Singapore.

Wishful Thinking

Officials for Trafigura and Nyrstar declined to comment on the deal. A spokesman for Avenue, which sold its position before the restructuring agreement, also declined to comment. Officials at Monarch and Warwick didn’t return calls and emails seeking comment.

Alchemy Partners is also among funds that purchased bonds, people familiar with the matter said last month, though it’s unclear when they were involved. A spokesman for Alchemy wasn’t immediately available to comment.

Most distressed funds bought Nyrstar’s bonds between September and early November, during which time the price fell from about 90 cents on the euro to about 50 cents, according to people familiar with the trades.

The funds were still trying to get organized when the zinc giant announced it got $650 million of new money from Trafigura, they said. The commodity trader is at once Nyrstar’s largest shareholder, supplier, customer and senior-secured finance provider. It will hold a 98% stake in Nyrstar after the restructuring.

“In the restructuring process Trafigura held all the cards,” said Marc Pierron, a senior credit analyst at Spread Research in Lyon, France.

Still, the recovery for distressed debt investors could have been lower and funds that bought at the bottom may double their investments. Trafigura initially proposed a write-off of more than 80%, and Nyrstar’s bonds dropped as low as 25 cents on the euro in February, according to data compiled by Bloomberg. Bondholders pushed back, leading to the current package now worth about 50% of the original face value, with possible extra gains tied to the price of zinc, according to investors, who asked not to be named. On April 29, Nyrstar announced that a majority of creditors signed up for the deal.

Bondholder Package
Nyrstar’s bondholders will receive a package with a face value of 568 million euros, including:262.5 million euros of Trafigura perpetual bonds80.6 million euros of Trafigura senior notes225 million euros of instruments linked to zinc prices. In exchange, they’ll cancel 955 million euros of existing debtDeal accepted by holders of about 90 percent of Nyrstar bonds maturing in 2019, 2022 and 2024.

The worst losses may be faced by some of Nyrstar’s bank lenders, with Deutsche Bank AG in line to write down as much as 70% of face value. Insurance and syndication of its loan will mitigate some of the bank’s losses.

“For bondholders it was likely difficult to have a say given Trafigura was putting its hands on the company’s assets in exchange of financing Nyrstar’s working capital needs,” Pierron said. “The final deal is relatively decent for the bondholders.”

2019-05-10 08:41:28.981 GMT

With assistance from Jack Farchy and Andy Hoffman.