Molycorp Creditors Attack Oaktree's `Monopoly Money' Debt Claim

  • Bankrupt miner may pay fund $374 million on $200 million loan
  • Junior creditors accuse Molycorp of rigging asset auction

After two months of mediation, Molycorp Inc. is due in court Friday to confront bondholders who say the rare earths miner is rigging its bankruptcy so lender Oaktree Capital Management LP can collect about $374 million on $200 million in loans.

A committee of creditors says the 2014 loans were a bad deal for Molycorp. They’re ready to sue company managers and Oaktree to nullify the claim or have it greatly reduced.

The dispute cuts to the heart of Greenwood Village, Colorado-based Molycorp’s plan to sell its assets. Under bidding rules the mining company proposed, Oaktree can swap its claims for equity in Molycorp. Creditors say that gives Oaktree an unfair advantage over other potential suitors because the distressed-debt giant can use those claims instead of cash at the auction.

“Oaktree, thus, can use ‘Monopoly money’ in the form of inflated claims to ensure that bidders will stay away,” the committee said in court papers filed in December.

Molycorp has also agreed that the Oaktree claims take precedence over most others, which means lower-ranking creditors can’t collect anything until Oaktree is paid $514 million, which includes the disputed debt and new loans it gave the company at the start of the bankruptcy.

Auction Rules

At a hearing in Wilmington, Delaware, Friday, U.S. Bankruptcy Judge Christopher Sontchi is scheduled to decide whether the auction rules are fair and whether Molycorp’s related reorganization plan should be sent out for a creditor vote. Later this month, he’ll consider giving the creditor committee authority to sue Oaktree.

Jim Sims, a spokesman for Molycorp, declined to comment on the committee’s allegations, as did Alyssa Linn of Sard Verbinnen & Co., a spokeswoman for Oaktree.

On Jan. 6, Molycorp defended its actions and the Oaktree loans in court papers, accusing creditors of “half-truths and reckless insinuations that have no evidentiary support.”

Molycorp, which filed for bankruptcy protection in June, has spent weeks in court-ordered mediation with creditors that has borne little fruit. Two groups are fighting the auction rules and reorganization plan: an official committee of unsecured creditors including bondholders, employees and suppliers; and an ad hoc committee of investors in Molycorp’s 10 percent secured notes.

Repayment Penalty

Molycorp borrowed $250 million from Oaktree in 2014 to help finish upgrades at its mine in Mountain Pass, California. But the company agreed to let Oaktree discount the debt, so Molycorp only saw $198.7 million.

The loan terms included a fee for early repayment. Because Molycorp’s reorganization plan anticipates paying off Oaktree ahead of schedule, the debt swelled to $374 million. Oaktree lent the company more after the bankruptcy, bringing its total claim to about $514 million, according to court records.

Early termination fees -- designed to compensate lenders for lost interest revenue or other costs -- are controversial in bankruptcy court. Judges sometimes rule that they don’t apply once a company is in Chapter 11.

Rare earths are obscure elements used in devices including magnets for electric cars and wind turbines. Molycorp filed for bankruptcy after prices dropped, making its California mine unprofitable. The processing division, which sells rare earths from lower-cost mines in China, remains profitable.

The company has been soliciting bids for its assets, including the California mine and processing division. It’s received offers from Chinese firms for its non-U.S. assets, while private-equity firm Carlyle Group LP has held talks about a possible bid, according to people familiar with the sale process.

Molycorp received initial interest from 20 potential bidders. Company financial adviser Miller Buckfire & Co. is pursuing the next stage and managers are making presentations to investors who may bid, according to court filings.

In court papers, creditors said no one has yet made a binding offer or completed a full evaluation of Molycorp’s finances.

The case is In re Molycorp Inc., 15-bk-11357, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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