OAK Oaktree Capital Group LLC

By Peg Brickley 

A failed effort to find a buyer has roiled the bankruptcy of Molycorp Inc., a rare-earths company that is pursuing a plan that will make it largely the property of Oaktree Capital Group LLC.

After scrapping an auction because of a lack of acceptable bids, Molycorp is trying to get out of bankruptcy reorganized around one line of business, Neo, with the fate of another still up in the air. Mountain Pass, a facility in California that is the only U.S. source of rare-earths elements used in consumer electronics, went unsold and may be liquidated.

Bondholders are saying Molycorp wrongly rejected their bid for the Mountain Pass facility---the only bid that came in for a line of business Molycorp spent $1.7 billion to establish.

Molycorp lawyer Lisa Laukitis defended the decision at a court hearing Tuesday, saying bondholders attached too many conditions to their offer. No decision has yet been made about the fate of the Mountain Pass facility, she said.

"They are going forward with a plan today that doesn't answer a basic question---what's happening with Mountain Pass?" said Joshua Brody, lawyer for the bondholders, who are owed $650 million, speaking at a hearing Tuesday in the U.S. Bankruptcy Court in Wilmington, Del.

"I don't know what they're doing. I don't think they do either," Mr. Brody said.

Under questioning from Judge Christopher Sontchi, Ms. Laukitis said Molycorp will make a decision about Mountain Pass before the chapter 11 plan is up for confirmation. Confirmation hearings are slated to begin March 29.

Molycorp was in court seeking permission to mail out voting materials for a chapter 11 exit plan that calls for the company to reorganize around Neo, which processes rare earths.

Voting materials were recently revised to reflect a settlement between unsecured creditors and Oaktree over how to divide the value in the reorganized Molycorp. Bondholders oppose the settlement, as do lawyers for shareholders that sued officers and directors over the company's failure.

Molycorp filed for chapter 11 protection in June 2015, its balance sheet rendered unworkable due to a switch in Chinese trade policy that sent the prices of rare earth's diving. Shareholders sued, and hoped to collect against Molycorp's officers and directors liability insurance.

The settlement instead lets Molycorp's leaders and its insurance company off the hook in exchange for some money for unsecured creditors. "Defrauded purchasers of stock are now being kicked to the curb," said Michael Etkin, lawyer for Molycorp's unhappy shareholders.

Molycorp, Oaktree and unsecured creditors say the settlement was the best way out of a morass of arguments that marked the chapter 11 proceeding. Bondholders left out of the negotiations say the deal is bad and that they will challenge it when Molycorp's bankruptcy exit plan is presented for confirmation.

Meanwhile, bondholders will be pressing an effort to force Molycorp to sell the mineral rights and intellectual property associated with the rare-earths mining operation to them.

Mining operations at Mountain Pass stopped last year, as a bad market for commodities got even worse.

Mr. Brody said bondholders may not be willing to take on the mine itself, due to uncertainty about the liabilities associated with it. Molycorp's court papers say the company spent $1.7 billion outfitting the facility with specialized equipment.

Under Molycorp's chapter 11 plan, Oaktree stands to get 92.5% of the value in a reorganized company, while unsecured creditors get the rest.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)

Write to Peg Brickley at peg.brickley@wsj.com

(END) Dow Jones Newswires

March 08, 2016 16:58 ET (21:58 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.