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A Mississippi Business Journal Q&A

Mississippi Chemical looks to emerge from bankruptcy

YAZOO CITY – Last December, Mississippi Chemical faced a dire situation. The Yazoo City-based company had filed for Chapter 11 bankruptcy protection in May 2003 and faced certain liquidation when Delaware Street Capital (DSC), LLC, came calling.

Equity investment firms DSC and DDJ Capital Management partnered to provide $165 million in financing to save and rebuild Mississippi Chemical. DSC is based in New York City and Chicago; DDJ is based in Wellesley, Mass.

Under the proposed plan, Mississippi Chemical would maintain key operations, remain based in Yazoo City and would emerge from bankruptcy this summer, in time to negotiate key annual contracts needed to turn around the company.

DSC director Gary Katz, a former bankruptcy attorney, talked to the Mississippi Business Journal about how and why the company became involved in the deal, what`s next for the chemical company and whether DSC and its partners plan to invest in other Mississippi firms.

Mississippi Business Journal: How did DSC become involved with Mississippi Chemical?

Gary Katz: Last fall, we were working on another deal in St. Louis – it was a very hostile situation, totally unrelated to Mississippi Chemical – and we hired an expert witness who worked for the same firm as the unsecured creditors committee. He told me that in the Mississippi Chemical case, the banks had succeeded in forcing the company to sell at a distressed fire sale price its assets. We knew the chemical company was in distress, but we were not aware that the banks had succeeded in getting a motion approved, which basically forced the company to liquidate its assets one at a time until the bank loans were paid off.

The first asset to be sold was going to be the Trinidad facility, which was an important balance to Mississippi Chemical`s domestic assets. The chemical business is a cyclical one, and right now, it`s in the middle of a down cycle because raw material prices, particularly natural gas prices, are out of whack. (Natural gas is needed to make nitrogen, which accounts for more than half of company sales.) Right now, Mississippi Chemical`s domestic facilities are not competitive. The workers are on furlough or the plants are shut down. When domestic facilities are bleeding, the company is able to make money in its offshore facility. Conversely, when domestic assets are making money, as they were a few years ago, and as we believe they will a few years hence, their offshore asset isn`t making much money. But it doesn`t matter because it`s a perfect balance.

So, we cold-called Mississippi Chemical. They had unsuccessfully tried to raise money. We specialize in situations where no rational person wants to lend or invest money, so I met with Chuck Dunn and other senior managers who asked us our plans. They had a court order demanding they sell this asset. We asked, ‘What if we were willing to lend you money subordinated to the bank loans in your bankruptcy so that you could pay down the banks this required cash instead of selling this asset and breaking up this whole company?’ They said that would be great, but they’d looked at that option and no one would do it. And we said, ‘Let`s do more due diligence and we`ll do it.’

We lent them not $70 million, but $97 million, in a very unusual maneuver- supplemental debtor-in-possession financing, meaning our loan was subordinate to the bank loans. This is almost never done. Our loan required no cash payment of interest. The company took our money and used it to pay down the banks. The bankers were very upset. They wanted to liquidate the company and get their cash back. (The company had a $200-million unsecured bond issue at the time. Those bonds were trading at seven cents on the dollar because the bondholders knew the banks were liquidating the company.)

So we were tired of fighting the banks and came up with another $65 million and took out all of the rest of the bank debt. We bought their position at par. We took out the bank debtor-in-possession, all their pre-petition loans, everything as Delaware Street Capital, and our partner in this venture, DDJ Capital Management. This was done in mid-January. Now we’re the company`s only secured creditor, for $165 million.

MBJ: Why did you take this risk?

GK: As a former bankruptcy lawyer, I know the biggest problem bankrupt companies face involve time and money. They need time to sort out their problems, and they need money to carry them through the losses and to pay off banks and lenders who have given up on them.

This is a big risk. Mississippi Chemical lives and dies by natural gas prices. Historically, the ceiling was $2 a million BTU. Since 2000, it`s traded as high as $10 and averaged $6. That`s the major cost of making chemicals. But we’re not lenders. We’re equity investors, and investors take risks. We’re also looking for relatively high returns to make up for the risk. Traditional lenders, particularly banks but also bondholders, aren`t in the risk game. Instead, they’re willing to take 6% or 8% interest. The moment something goes wrong, they’re willing to pull the plug. However, we believe that on a risk-reward basis, the risk inherited in this company is worth the investment.

To show you the value added to the company, the unsecured bonds that had trading at seven cents traded up to 25 cents immediately after our deal because the junior unsecured creditors understood by having us as investors, there was a chance this company could be reorganized and not just liquidated.

The company still has a lot of problems, but we’re now in phase two. We want and are seeking to bring it out of bankruptcy and give the company long-term financing and long-term equity so it can weather through not just two or three months, but two or three years until the company becomes profitable again.

MBJ: Mississippi Chemical owned 50% of the Trinidad plant, and Koch Industries, one of the largest privately- owned companies in the U.S., owned the other half. How did Koch Industries react to your plan?

GK: Koch Industries did not want this company saved. They were working with the banks to force the sale so Koch could buy the other half. An auction was held; Koch bid about $92 million. Nobody bid against them. It added a huge value when we came in and allowed the company to keep the asset internally. Mississippi Chemical just filed a reorganization plan that shows we’re willing to convert our debt to equity on a basis that values Trinidad at $105 million.

MBJ: Why did your firm decide to retain Mississippi Chemical`s Yazoo City headquarters? Will the executive management team remain in place?

GK: For us as investors, we have a very simple approach: we believe the whole is worth more than the sum of its parts.

We’re not a competitor of Mississippi Chemical. We’re not in the chemical business. We’re not trying to buy this company so we can fire the management, lay off as many people as possible, shut down headquarters or maybe even shut down the Yazoo City plant and sell off the machinery to China or the Middle East for very good money. That`s not what we’re doing – or going to do. We look for companies where we think the management is doing an OK job. Maybe it needs a few tweaks and a financial partner.

We don`t have to reinvent the company, but we can finance it in a way that makes sense for an investor to stand behind Mississippi Chemical in the down time. Sure, every time you go into a company, there`s always a little waste that needs to be cut, but the headquarters of this company will remain with the people who have been running it for 30 years. We have 100% confidence in COO Larry Holley.

After guiding this company since before its initial IPO and through its best years, we credit (Mississippi Chemical CEO) Chuck Dunn for working with us at great risk to his personal career. Chuck told the banks we had a duty to save Mississippi Chemical as a standalone company even though Mississippi Chemical`s competitors would pay a relatively good price to buy market share and remove capacity, that is, shut down plants. Chuck did a great job getting o
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rescue financing through the bankruptcy court. He delivered the company to a better position and then announced his retirement. He was a tremendous leader and he will remain in a consultative role for us.

The rest of Chuck`s management team, especially Holley, are born and bred Mississippi Chemical guys and we have no intention of changing them.

MBJ: What`s the next step?

GK: The company must come out of bankruptcy. It`s been in bankruptcy for a long time. Its customers are getting tired of hearing that the end is around the corner.

We achieved a major milestone when the company filed a reorganization plan a few weeks ago to emerge from bankruptcy June 30. After the June 8 hearing on the disclosure statement, there will be a solicitation period where creditors vote on the reorganization plan. I can tell you the guys who own $165 million-that`s us-will vote yes.

Then, we hope the court will schedule a confirmation hearing no later than late July. It is very important for this company to get out of bankruptcy because of its cycle of contracts.

MBJ: What are your plans to generate additional revenue for Mississippi Chemical?

GK: The ammonia for many fertilizers Mississippi Chemical makes is shipped in through Tampa, Fla., then shipped by rail and truck, very inefficiently, to the breadbasket of America and to ranches out west. In Donaldsonville, Mississippi Chemical has the furtherest north deep-water port on the Mississippi River that can offload ammonia. This is an important part of restructuring: the company will open those terminals to outside producers of chemicals, namely offshore producers, to ship in ammonia there and offload it at a very nice profit to the company. This is a nice way the company can weather its down cycle.

Those contracts are generally done on an annual cycle, beginning Jan. 1, and are negotiated in August and September. This company has to be out of bankruptcy by the middle of August to give its customers the confidence to sign annual contracts for the following year.

MBJ: DSC and DDJ have a third partner, Silver Point Capital, which has a 15% share of the Mississippi Chemical deal. Between the three funds, you control approximately $5 billion of capital. Would you consider other Mississippi investments?

GK: If we’re able to roll our investment over and our reorganization plan for Mississippi Chemical is approved, we won`t pack up and run away. We`ll be a partner in close touch with the people who run the company. We`ll be active in the Mississippi business community. Once we’re down there, it would be natural for us to expand our investment horizon. I met with (Mississippi Development Authority executive director) Leland Speed about your high-tech incubator. I’m looking at working with some of those companies.

Before Mississippi Chemical, I had never invested in Mississippi. I think it`s been totally overlooked by Wall Street. I’m happy about that because I like to look for new opportunities and we think Mississippi has those. That`s one reason we want Mississippi Chemical to remain a Mississippi-based company.

Contact MBJ contributing writer Lynne W. Jeter at mbj@thewritingdesk.com.

About Lynne W. Jeter

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