By Becky Yerak
Goldman Sachs Group Inc. plans to lend $4 million to bankrupt
Real Industry Inc. and to eventually spend about $10 million to buy
common stock in the publicly traded company, which is sitting on
almost $1 billion in potential tax benefits.
Real Industry filed for chapter 11 in November with $913.5
million in net operating losses -- potentially valuable because
they can be used to offset future earnings -- and said it needs the
Goldman Sachs loan to stay afloat in bankruptcy, including to
preserve the value of those tax deductions.
The Beachwood, Ohio-based holding company, which acquires
undervalued businesses and takes advantage of net operating losses,
said it has no access to the $365 million in financing that its
operating unit, aluminum recycler Real Alloy, had in hand from Bank
of America and others when it, too, filed for bankruptcy in
November.
Real Industry said the Goldman Sachs loan "will preserve and
maximize" the value of its business model while it is in bankruptcy
and avoid a liquidation that would result in the forfeiture of the
net operating losses.
Likewise, Real Industry said Goldman's plan to spend $10 million
in cash to own up to 49% of its common stock after bankruptcy would
give it a chance to make acquisitions "with a strong financial
partner." Goldman Sachs also would get a say in the makeup of Real
Industry's board of directors, documents show.
With an investment from Goldman, $913.5 million in net operating
losses and a plan to make acquisitions after emerging from
bankruptcy, Real Industry would be in a position to use some of
those losses to offset taxes on earnings from those deals.
A Goldman representative declined to comment.
A hearing on the proposed financing is scheduled for Jan. 17 in
U.S. Bankruptcy Court in Wilmington, Del.
Robert Willens, a Columbia University Business School professor
who has his own tax and accounting service, said tax reform affects
only net operating losses arising in years beginning in 2018.
"'Old' net operating losses are not affected by tax reform," he
said. "They can be carried forward without limitation."
A company involved in bankruptcy, however, will almost always
experience an ownership change, which can create limitations on the
use of the net operating losses, he said. Buying up to 49% suggests
to Mr. Willens and other tax professionals that Goldman Sachs
doesn't want Real Industry to undergo an ownership change for fear
that the net operating losses would be eliminated.
Under bankruptcy law, the ability to use net operating losses to
offset future taxes can disappear when there is a change of
ownership. But an exception to the law, known as the " old and
cold" rule, allows a company to keep its net operating losses as
long as 50% of the equity in the new company goes to investors who
have held their debt in the old company for more than 18
months.
Nick Gruidl, a tax partner at accounting firm RSM, said other
financial companies that have invested in companies loaded with net
operating losses include KKR & Co., which in 2014 invested in
what was left of failed Washington Mutual. Private-equity firms
also were attracted to the net operating losses of bankrupt solar
power equipment maker Solyndra LLC.
The new tax bill has changed the rules of using net operating
losses, generally limiting their use, says Matt Gardner, senior
fellow of the nonprofit Institute on Taxation and Economic Policy.
They can no longer be carried back, or, in other words, applied to
prior-year earnings. And, under the tax bill, there is now a limit
on how they can be used; they can be applied to only 80% of a
company's taxable income in any given year.
"So, in general, net operating losses will, as a result of the
tax bill, be less valuable than they used to be," Mr. Gardner said,
"which should mean that buying a big bucket of net operating losses
should be less helpful than it used to be."
At least one positive for users of net operating losses in the
new tax bill is the ability to carry them forward indefinitely,
said Bill Henson, a Plante Moran partner. Current rules have a
20-year limit, he said.
Since filing for bankruptcy in November, Real Industry and its
investment banker, Jefferies LLC, have looked for a lender to
provide debtor-in-possession financing, which allows companies to
pay day-to-day expenses and remain in control of their business
while being protected from creditors. Real Industry said Jefferies
contacted more than 25 parties, including big financial
institutions, private-equity funds and other alternative investment
firms. Three, including Goldman Sachs, submitted offers, according
to a court filing.
Goldman Sachs is considered the lead, or stalking horse, bidder
for the $10 million equity investment on Real Industry's common
stock. Real Industry may accept a better offer, but would pay a
$450,000 breakup fee to Goldman Sachs.
The Goldman Sachs loan has a 12% annual interest rate, documents
show. When the loan is completed, Goldman Sachs also would get an
upfront fee of $300,000 plus 4.9% of Real Industry's common stock
in a private placement, a term sheet shows.
Write to Becky Yerak at becky.yerak@wsj.com
(END) Dow Jones Newswires
January 09, 2018 14:39 ET (19:39 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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