Molycorp Cleared for Auction as `Monopoly Money' Fight Looms

Molycorp Inc. won court permission to put itself up for auction in March, even as bondholders complain that Oaktree Capital Management LP is trying to take over the rare-earth mining company using “Monopoly money.”

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

After about two months in mediation with creditors, Molycorp resolved disputes over auction rules that had threatened a sale. Proceeds from an auction would go toward repaying more than $500 million that Oaktree’s seeking and more than $1.4 billion senior and junior bondholders say they’re owed.

The auction is scheduled for March 4, Molycorp attorney Lisa Laukitis of the Jones Day law firm said Friday in Wilmington, Delaware, federal court. Senior bondholders will be allowed put up debt instead of cash, a practice in bankruptcy auctions known as credit bidding.

Left unresolved are bondholder complaints that Oaktree’s claims are inflated and don’t deserve to be honored before lower-ranking debts. That battle may not be resolved until after the auction, when Greenwood Village, Colorado-based Molycorp asks the court to approve its reorganization plan.

Two Options

Molycorp is pursuing two options for exiting bankruptcy: an auction or a debt-for-equity swap in which Oaktree would take over the company. 

Should it get binding offers that are high enough, Molycorp will sell some or all of its assets and use the money to pay creditors including Oaktree. Otherwise, the mining company will ask U.S. Bankruptcy Judge Christopher Sontchi to approve a reorganization plan that would hand Oaktree control of the company.

Creditors fighting Oaktree and Molycorp include senior bondholders who hold part of the $687 million in Molycorp 10 percent notes and unsecured bondholders who hold as much as $753 million in convertible notes.

Molycorp has agreed that Oaktree must be paid first because it holds collateral rights on some assets. Bondholders are fighting that claim, and a committee of unsecured creditors is preparing to sue to reduce or eliminate the $374 million that Molycorp says it owes Oaktree.

‘Monopoly Money’

Last month, the committee accused Molycorp of handing Oaktree an unfair advantage over rival bidders by declaring that the loans were legitimate.

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

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

To end the disputes over auction rules, Molycorp agreed to give lower-ranking creditors and secured bondholders more influence on how the auction will be run, including the right to talk directly with potential bidders.

The unsecured creditors’ committee also won the right to be involved in selecting any so-called stalking-horse bidder. That bidder would make a binding opening offer at auction, setting the minimum amount that Molycorp would get for any assets it sells.

Plan Approval

Sontchi accepted the bidding rules Friday, but the “Monopoly money” dispute may not be decided until late March, when Molycorp will ask the judge to approve a reorganization plan tied to a successful sale or an Oaktree takeover.

Molycorp borrowed $250 million from an Oaktree unit in 2014 to help finish upgrades at a mine in Mountain Pass, California. Oaktree was allowed to discount the debt, meaning Molycorp only saw $198.7 million. The miner has agreed that Oaktree can collect $374 million, because of a penalty for early repayment. Including another loan Oaktree made after the bankruptcy filing, the total tab runs to $514 million.

Seeking Bids

Molycorp has been soliciting bids for its assets, including the California mine and the 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, people familiar with the sale process have said.

Molycorp asked Sontchi Friday for permission to distribute its disclosure statement -- which explains the reorganization plan -- to creditors so they can vote. The company and creditors will work on the final wording of the disclosure statement, including changes the judge requested, and send it to him for final approval.

Once creditors vote on the plan, Sontchi will hold a hearing at the end of March to decide whether to approve the proposal.

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