Brigade Capital Raises Squeeze Out Concerns at OCI Partners

NEW YORK--()--Brigade Capital Management, LP (“Brigade”), on behalf of a fund managed by it, issued correspondence with OCI Partners LP (“OCIP”; NYSE:OCIP) regarding ownership of the business. In light of last month’s material increase in OCI N.V.’s (“OCI”) ownership in OCIP, Brigade has become concerned with the prospect of a forced squeeze out of OCIP’s minority unitholders at a grossly inadequate price.

Below, in reverse chronological order, are copies of the letters between Brigade and OCIP addressing this concern. Subsequent to the most recent letter dated January 18, 2018, Brigade representatives participated in a call with certain members of OCI and OCIP management. While Brigade representatives found the call constructive, OCIP’s commitments fell short. Therefore, Brigade decided to publicly release the above mentioned letters in order to alert OCIP’s minority investors of the squeeze out risk. As discussed in more detail in the letters, Brigade believes OCIP’s current unit price is materially below its fair value and, absent a near term squeeze out, represents a compelling investment opportunity.

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January 18, 2018
 
Mr. Michael Bennett
Chairman of the Board
OCI GP LLC
P.O. Box 1647
Nederland, TX 77627
 

Via E-mail and USPS Priority Mail Express

Dear Mr. Bennett (on behalf of entire board of directors):

Thank you for your letter dated January 15, 2018 (the “Company’s Response”). We are disappointed that OCI Partners LP’s (“OCIP or the “Company”) Board has decided that no additional public disclosures are warranted to protect minority common unitholders from a potential squeeze out by OCI N.V. (“OCI”) or its affiliate at a grossly inadequate price.

As a justification for the Board doing nothing beyond its past practice, the Company’s Response refers to: 1) OCI’s Amendment No. 4 to its Schedule 13D, filed on December 28, 2017 on which you base your understanding that “OCI does not have any present plans or proposals that would result in” a minority squeeze out; and 2) the notion that given the “typical levels of volatility in commodity prices … providing annual guidance … is of limited value”.

We strongly disagree with the above rationale, given current circumstance. With respect to your first point, the fact that as of December 18, 2017 OCI has not disclosed intentions on whether to cross the key 90% ownership threshold does not mean that OCI may not do so at any moment (even as we are writing this letter). In fact, in the very same amendment to the Schedule 13D, OCI states that itmay acquire additional securities of [OCIP] … in the open market or in privately negotiated transactions.” The SEC filing further states that if OCI or its affiliates “at any time … own more than 90% of the common units” they “will have the right … but not the obligation, to acquire all … of the Common Units held by public unitholders at a prices not less than their then-current market price, as calculated pursuant to the terms of the Partnership Agreement”. Following the recent purchases, the filing states that OCI and its affiliates “now own approximately 89.26%” of OCIP’s common units. Nowhere in this filing is there any statement that OCI or its affiliates do not intend to purchase additional units of OCIP. As a commercial actor whose interests are presumably to pay the lowest possible price for OCIP’s common units (in complete conflict with OCIP’s minority common unitholders’ desire to obtain the highest possible price), it is not surprising that OCI would not make public its intentions to cross the key 90% ownership threshold until the last permissible moment.

With respect to your second point, while we acknowledge that there is volatility in commodity prices that can meaningfully impact annual results, given how close OCI is to reaching 90% ownership threshold of OCIP, we believe further and prompt disclosures on potential financial performance are more than warranted. Based on certain U.S. benchmark contract pricing for the Company’s two primary products, methanol and ammonia, and the earnings sensitivity framework provided by the management on the 3Q17 earnings call, we estimate that OCIP will produce $0.51 in distributable cash flow per common unit in 1Q18. At this point, the only variables that could materially change this result are the price of natural gas and unanticipated plant disruption. 1 If OCIP in fact ends up producing such a result, we anticipate that the price of common units will be materially higher than current price. However, based on the Company’s past practices of scheduled earnings releases and investor calls, the investment community will not get confirmation of 1Q18 results until early May. That will be 4.5 months after OCI’s disclosure of materially increasing its holdings in OCIP to 89.26%. Given the large discount at which OCIP’s common units trade to their intrinsic value (in our view) and the likelihood of a near term minority squeeze out, the Board is unreasonably exposing minority unitholders to a risk of large losses (difference between intrinsic and squeeze out price). We therefore urge the Company to at least accelerate simultaneous disclosure of key financial metrics for the 4Q17 and provide guidance for the 1Q18 based on current trends. This is not only a prudent, but also a fair, thing to do.

Since the minority squeeze out price of OCIP’s common units (if and when OCI crosses 90% ownership threshold) is the greater of (1) the Current Market Price2 and (2) the highest price paid by OCI or its affiliates during 90 day period preceding the date of the squeeze out notice, it is clear how OCI gains and minority holders lose if the 90% ownership threshold is crossed while the Company’s units trade at substantial discount to their intrinsic value.

Given all of the above, unless we get a satisfactory response from the Board within 48 hours of receipt of this letter, we will be left with no other option but to publicly disclose this letter, along with the one dated January 9, 2018 and the Company’s Response, all in the hope that they will further educate the investor community of the earnings power OCIP possesses. Importantly, this potential is not just academic and hypothetical, it is in fact on its way to being achieved as we write this letter.

Brigade reserves all its rights, including a right to challenge a potential minority squeeze out that results in grossly inadequate consideration to unitholders. Please feel free to contact either of us should you have any questions.

Very truly yours,

Ivan Krsticevic       Kunal Banerjee
Partner Partner
 

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January 15, 2018
 
Brigade Capital Management
399 Park Ave, 16th Floor
New York, NY 10022
 

Dear Messrs. Krsticevic and Banerjee:

On behalf of the Board of Directors (the “Board”) of OCI GP LLC, the general partner of OCI Partners LP (the “Partnership” or “OCIP”) and a wholly owned subsidiary of OCI N.V. (“OCI”), I acknowledge receipt of your letter dated January 9, 2018 (the “Letter”), which has been distributed to the Board.

Based on Amendment No. 4 to OCI’s Schedule 13D, filed on December 28, 2017, we understand that OCI does not have any present plans or proposals that would result in or relate to any extraordinary corporate transaction, such as a merger, reorganization or liquidation or causing the common units of the Partnership to be delisted from the New York Stock Exchange.

The Partnership, after a thorough review by the Board (including its independent directors), currently provides a run-rate quarterly distribution guidance to assist investors in understanding the relationship among commodity prices, utilization and potential future distributions. Given the typical levels of volatility in commodity prices, it has and continues to be the Board’s view that providing annual guidance based on monthly prices is of limited value because it emphasizes short-term developments in the business which may not reflect annualized performance. The Board also notes that, in addition to providing run-rate quarterly guidance, the Partnership’s senior management provides information regarding the Partnership’s financial results and corporate developments, as well as commodity market updates, on quarter conference calls with investors. Consistent with its historical practice, the Partnership intends to conduct a call addressing the fourth quarter of 2017 following results announcement in the near future.

Finally, for the sake of clarity, the Board also notes that the Partnership’s partnership agreement (the “Partnership Agreement”) replaces the concept of fiduciary duties with contractual standards governing the general partner’s duties. For additional information on the contractual standards, please review the Partnership Agreement filed with the SEC on October 15, 2013 or the Prospectus filed with the SEC on October 7, 2013.

The members of the Board regard their obligation to the Partnership and its unitholders with the utmost seriousness, and we appreciate your sharing your views with us.

Sincerely,
OCI GP LLC
 
By: Michael Bennett
Chairman of the Board of Directors
 

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January 9, 2018
 
Mr. Michael Bennett
Chairman of the Board
OCI GP LLC
P.O. Box 1647
Nederland, TX 77627
 

Via E-mail and Federal Express

Dear Mr. Bennett (on behalf of entire board of directors):

A fund managed by Brigade Capital Management, LP (“Brigade”) beneficially owns a meaningful economic interest in the common units and debt of OCI Partners LP (“OCIP” or the “Company”). As a significant investor, we carefully monitor developments at the Company and feel it is important to have an open dialogue with the Company so that views and ideas can be exchanged. We ask that you pass a copy of this letter to the rest of the board of directors, including to members of the Conflicts Committee.

We noted that on December 27, 2017, OCI NV (“OCI”) announced that it intended to acquire 7.3 million common units (8.4% of the publicly-held common units of OCIP) from minority holder(s) for a consideration of $61 million, implying $8.40 per common unit. Following the transaction, OCI’s ownership in OCIP would rise from 79.85% to 88.25%.

Given this material increase in OCI’s ownership of OCIP, it appears to us that OCI is positioning itself to attempt to squeeze out minority unitholders, which if it were done today, would severely shortchange the minority holders. Given, in our view, the currently depressed price of OCIP common units and likely significant improvement in financial performance of the company in 2018 compared to 2017, it is imperative that the independent directors (either themselves or through OCIP) issue relevant guidance for EBITDA and distributions for 2018 so that investors can more appropriately value the common units.

As evident to us, based on distribution guidance sensitivities provided by OCIP management on its Q3 2017 earnings call, distributions for Q1 2018 could rise to $0.51/common unit (or $2.04/common unit annualized) based on contract price settlements for methanol and ammonia for the month of January 2018. Even at a very conservative 15% distribution yield, implied fair value for OCIP common units would approach $14 based on such distributions.

Brigade’s investment in OCIP is based on (1) a favorable cyclical outlook for methanol and ammonia where economics are expected to improve off trough conditions in the near to medium term, (2) significant potential for growth via the drop down of additional methanol capacity into OCIP, and (3) significant undervaluation as outlined above.

Brigade believes that any attempt to squeeze out minority unitholders at this point would be an opportunistic and grossly unfair move to impair cyclical upside for minority unitholders ahead of a marked upturn in OCIP’s fundamentals. We therefore urge the Board, in general, and the Conflicts Committee, in particular, to make every effort to communicate clearly and promptly to investor community true prospects of OCIP’s financial performance so as to minimize or fully eliminate the real risk of minority unitholders being taken advantage of.

We believe that fiduciary duties mandate that you and OCIP’s independent directors act in the best interests of all OCIP unitholders. We ask that you let us know within five business days of receipt of this letter if you intend to promptly communicate to investors OCIP’s likely financial performance (for at least year 2018) based on recent methanol and ammonia pricing trends.

Brigade reserves all its rights, including a right to challenge a potential minority squeeze out that results in grossly inadequate consideration to unitholders. Please feel free to contact either of us should you have any questions.

Very truly yours,

Ivan Krsticevic       Kunal Banerjee
Partner Partner
 

About Brigade Capital Management, LP

Brigade Capital Management, LP is an SEC-registered investment advisor focusing on investing in the global high-yield market and levered equities. The firm was founded in 2006 and is managed by Donald E. Morgan, III, CIO and Managing Partner. The firm is headquartered in New York City with offices in the United Kingdom, Japan and Australia. The firm employs a multi-strategy, multi-asset class investment approach focused on leveraged balance sheets. The core strategies include long/short credit, distressed debt, capital structure arbitrage and levered equities. Brigade Capital Management, LP’s investment process is fundamentally driven, focusing on asset coverage and free cash flow, with an emphasis on capital preservation. The team possesses deep sector expertise throughout the entire leveraged finance market and has extensive experience in capital restructurings and bankruptcy reorganization.

1 If you think our analysis is erroneous and differs materially from the reality, we invite and welcome your feedback to show us how we are wrong.
2 Current Market Price is defined in OCIP’s Partnership Agreement as the average of the daily closing prices per limited partner interest for the 20 consecutive trading days beginning with the third business day prior to the date the purchase notice is mailed.

Contacts

Sard Verbinnen & Co.
Jamie Tully, 212-687-8080

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