Trona mining company bankruptcy sale closes; creditors would get 3 to 3.6 cents on the dollar under pending plan

The sale of assets of Searles Valley Minerals and affiliated companies in Trona closed as expected on Thursday.

Bankruptcy proceedings continue and earlier this week the plight of hundreds of unsecured creditors — including some Bakersfield and Kern County businesses — was made clear. They would receive only pennies on the dollar for their claims if a liquidation plan for the bankrupt companies is approved. It's unclear how much the unsecured creditors might get if the plan isn't approved.

The liquidation plan was filed in a Delaware bankruptcy court on Tuesday. Searles and its affiliates — Trona Railway Co. LLC and Searles Domestic Water Company LLC — filed for Chapter 11 protection on June 15. Three days later, the first creditor claims were filed with the court.

Closing of the sale of assets of the Trona companies to 5E Advanced Materials, Inc., announced on Sept. 15 and approved by the court on Sept. 21, has been finalized according to a filing 5E made with the Securities and Exchange Commission on Oct. 1. The actual buyer is identified as 5E SVM, LLC, a wholly owned subsidiary of 5E Advanced Materials, Inc.

The general unsecured creditors, with claims estimated at between $70 million and $85 million, would be paid at a projected 3.0 to 3.6 cents on every dollar.

Most of the unsecured creditors are firms — small and large — that did business with one or more of the Searles companies. Products or services were provided and invoices sent. Those still unpaid when the companies waved a white flag with the June bankruptcy filing became claims in the case.

An estimated $76 million obligation to the California Air Resources Board under the state's cap-and-invest program is being handled separately. The plan says it was resolved in a settlement under which the company was to surrender emissions compliance instruments at closing.

Searles Valley Minerals operates as a wholly owned subsidiary of Karnavati Holdings, Inc., which is owned by Nirma Limited, a major Indian industrial conglomerate. Nirma purchased Searles from a private investment firm around November 2007.

Searles opted for the bankruptcy, according to the liquidation plan, because of mounting losses and a liquidity shortfall. Specific challenges cited in the plan began with the July 2019 Ridgecrest earthquakes, which cost the company about $50 million in repairs and lost revenue.

The plan said the disruption from the earthquakes cut earnings before interest, taxes, depreciation and amortization (EBITDA) from about $52 million in fiscal 2019 to about $2 million in fiscal 2020.

It also cited worldwide oversupply of soda ash, including synthetic product from China, weak demand and higher production costs tied to environmental regulation. The company said net soda ash sales fell from about $223 million in fiscal 2023 to about $147 million in fiscal 2026. Soda ash is not currently produced in Trona.

During bankruptcy negotiations, Nirma agreed to provide $3 million to fund a trust to pay unsecured creditors in exchange for an agreement that the creditors can't sue Nirma after the sale to 5E closed.

The proposed liquidation plan must be approved by a vote of creditors, including general unsecured creditors, and the court. More claims may be submitted by an Oct. 21 deadline for most claims and a Dec. 14 deadline for governmental claims. Priority, tax and other secured claims are to be paid in full once their amounts are approved.

HSBC Bank USA, National Association's $82 million loan made prior to the bankruptcy filing, is addressed in the liquidation plan. The bank is projected to recover 43 percent, or about $35 million. HSBC would receive money collected on the companies' receivables, half of a $6.22 million note from the buyer and half of the 5E Advanced Materials stock issued in the sale, a tax refund, and a share of any assets left after the sale. The other half of the note and stock goes to Karnavati.

The plan states that Karnavati is owed about $135 million in unsecured loans it made to Searles. Under the plan, that money would be subordinated with the parent company receiving nothing. Karnavati is also the lender that financed the bankruptcy, and in that role it would be paid ahead of unsecured creditors, receiving half of the 5E note and stock and sharing equally with HSBC in anything left over until that loan is repaid.

What's next?

Objections to creditor voting procedures are due by Oct. 6 with a hearing on voting procedures proposed for Oct. 13. Nov. 13 is the deadline for voting and for objections to the plan, with a confirmation hearing for the liquidation plan proposed for 2 p.m. on Nov. 18.

A dispute over a $3.18 million mechanic's lien claimed by Process Equipment Inc. remains unresolved. The debtors are asking the court to limit the claim to no more than $250,300. At a Sept. 28 hearing, Judge Brendan L. Shannon ordered that $4 million in 5E stock be set aside while the dispute is pending, and said he expects a hearing on the claim within 30 to 60 days.

Case information is online at cases.stretto.com/SVM.

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