Georgia Gulf (GGC)

Georgia Gulf Corporation is a leading North American manufacturer and marketer of two integrated chemical product lines, chlorovinyls and aromatics. Its key products are chlorine, caustic soda, vinyl chloride monomer (VCM), polyvinyl chloride (PVC), cumene, phenol and acetone. In October 2006, the company completed the acquisition of Royal Group, a leading supplier of vinyl-based building and home improvement products. Under the Royal Group brand, Georgia Gulf manufactures a complete line of custom and other vinyl-based building and home improvement products. The company's sales are entirely in the US and Canada.

Georgia Gulf is suffering from potentially overpaying for Royal Plastics, a company that makes vinyl-based housing products. The $1.5 billion acquisition resulted in an equal increase in debt. The acquisition was financed with new debt. The company recently renegotiated its debt compliance (leverage and interest coverage) ratios, as the company is in danger of non-compliance.

Sandelman Partners, an investment firm alleged Georgia Gulf of defaulting on the debt issued in 2003. Sandelman, holding more than 25% of GGC's debt claimed full repayment of the debt. Sandelman holds $44 million of GGC's $100 million 7.125% notes due 2013. Sandelman alleged GGC of issuing more debt than allowed under the indenture. It claims that Georgia Gulf slipped below the interest coverage ratio of 2x in 2007 as per the indenture and that incurrence now outstrips the $525 million basket and $75 million allowance. The hedge fund calculates the breach based on a reduction of $361 million from the repayment of term debt with asset sale proceeds in 2007 and $200 million from the term debt outstanding in December 2003 when the 7.125% notes were issued. Sandelman demanded prepayment of the 7.125% notes, which would force GGC to raise new debt. However, GGC denied the charges and argued that the sum is no longer applicable to the incurrence basket since it paid off the balance of the 2003 term loan in 2004 and 2005 with operating cash flow. The company filed a complaint in the Delaware Chancery Court for injunctive and declaratory judgement.

On the product side, the operation of a new PVC facility by Shintech Inc., the largest producer of PVC in the US is likely to worsen conditions in an oversupplied market. The phenol business has been under pressure in recent years from Asian increases in capacity thereby, reducing export volumes. Operating rates remain rather low in this business, at 88%. Operating rates are low in the caustic/chlorine business, at 85%.In the chlorovinyl segment, operating rates are also low at 87%. Difficult market conditions in both the US and Canada, coupled with rising feedstock costs are affecting each of the company's businesses. A poor housing market has also hurt the company GGC has closed its Oklahoma City PVC resin plant, which has a capacity to produce 500 million pounds of PVC resin per year. The company also temporarily idled its Sarnia PVC resin plant. The company plans to use the proceeds to repay a part of its debt amounting to $125 million in 2008.

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