Bonds backing Tronox traded higher today after a judge ruled Anadarko Petroleum may be responsible for environmental clean-up costs and legal liabilities totaling more than $5 billion. Tronox 6.375% notes due 2020 advanced in active trading, changing hands about a point higher, at 102.375-102.75.
Tronox’s covenant-lite term loan due 2020 (L+350, 1.5% LIBOR floor) is little changed today on the news, quoted at 101.25/101.625, though it is worth noting the 101 soft call protection rolls off in March, sources said.
The ruling was not positive for Anadarko Petroleum. Spreads referencing exposure to Anadarko Petroleum widened, including a 21% rise in costs to purchase protection on the company’s debt on the CDS market. Anadarko five-year CDS rose 18 bps, to 103 bps, marking the first move above the 100-bps level in five months, from interim lows near 70 bps in October, according to Markit.
Anadarko’s 6.45% issue of bonds due 2036 was the most active in subdued secondary market, changing hands 20-25 bps wider on the day, at a weighted average at T+163, according to trade data published by MarketAxess.
Spreads for shorter-dated issues for the company – which has not placed a new debt deal in more than three years – were similarly 20-40 bps wider on the day, trade data show.
Kerr-McGee spun off Tronox in 2006, at which point Tronox assumed $550 million of debt and $49 million of annual interest costs. Anadarko then bought Kerr-McGee for $16.4 billion in cash and the assumption of $1.6 billion of debt.
Tronox filed for Chapter 11 in 2009, blaming legacy liabilities for environmental clean-up and related litigation costs, as well as interest costs heaped on the company after Kerr-McGee spun it off.
In the ruling, U.S. Bankruptcy Judge Allan Gropper said evidence showed the defendant, Kerr-McGee, should have believed Tronox would incur debts it could not pay.
“The complaint charges that these three entities were left with 70 years and billions of dollars of legacy environmental and tort liabilities when the oil and gas assets of the group were transferred out and spun off,” said U.S. Bankruptcy Judge Allan Gropper in the ruling dated yesterday.
Tronox sought to recover the value of the transferred oil and gas assets left in the company which Anadarko acquired through the purchase of Kerr-McGee. Judge Gropper said the transaction left Tronox insolvent and undercapitalized, and did not reflect reasonable value.
“These assets were acquired by Anadarko for $18 billion only a few months after they were spun off, and there is no dispute that they are worth billions more today.”
After the 2006 spin-off, until the time of the bankruptcy filing, Tronox spent $118 million on legacy liability costs. In addition, the company by that time had spent $27 million for lawsuits to victims of hazardous materials released by the legacy business.
“Defendants never even performed an analysis of Tronox’s ability to satisfy the legacy liabilities. They should have been aware that Tronox could not satisfy the legacy liabilities even if many could be ‘managed,’” Judge Gropper said in the ruling.
Tronox emerged from Chapter 11 in 2011 following bankruptcy court approval of two trusts created to fund environmental-cleanup costs and potential litigation from various tort claimants.
Under the reorganization plan, Tronox settled government claims related to its environmental liabilities through environmental response trusts and a litigation trust, which Tronox funded with $270 million in cash; certain Nevada assets, including property located in Henderson, Nev.; at least $50 million in insurance and financial assurance assets; and 88% of the company’s interest in the pending Anadarko litigation, which was due to begin the following year.
Tort claimants with claims related to asbestos, benzene, creosote, and other liabilities will recover from trusts funded by $12.5 million in cash, 12% of Tronox’s interest in the Anadarko litigation, and certain insurance assets.
Tronox sold $900 million of 6.375% senior notes due 2020 at par in August 2012 through Goldman Sachs, Credit Suisse, and UBS. The company planned to return $400 million to shareholders, including share buybacks, and use the rest to fund general corporate purposes, including possibly also to shareholders. Strong demand for the deal prompted a $250 million upsizing.
Oklahoma City, Okla.-based Tronox produces titanium dioxide pigment, which creates whiteness, brightness, and opacity in paint, paper, and plastic. – Abby Latour