Graftech, Credit Analysis to Break Down the Out-of-Court Restructuring

Welcome to the 128th Pari Passu newsletter.

Today, we are going to take a look into Graftech, a graphite electrode manufacturer. Graftech’s story is fascinating, as it has been able to stave off industry headwinds due to beneficial contracts it entered into years prior. However, a business that expends more than it makes will always struggle in the long run, and Graftech is an example of this.

Within the past year, liquidity for Graftech has dried up significantly, and the company began to explore restructuring alternatives as of the beginning of 2024. In this paper, we will be doing a full credit document analysis to understand the terms that governed its restructuring transaction that was completed in late 2024, as well as propose our own hypothesis on how this restructuring actually took place.

Company Overview

Based in Ohio and founded in 1886, Graftech International (NYSE: EAF) is a manufacturer of graphite electrodes, the main product used in the production of electric arc furnace (EAF) steel. To best understand what Graftech does, we must first understand how the steel production process works. 

While the scientific nuances behind steel production are quite complex, a 30,000-foot view of the production of steel outlines a simple flow process. Like anything, the production of steel boils down to the inputs and outputs. Historically, the input for steel production has been iron extracted from iron ores. This extraction process typically occurs in a blast furnace. Once the iron has been extracted, it is put into a Blast Oxygen Furnace (BOF).  Without getting too complex, the molten iron that was produced in the blast furnace is then refined into steel by subjecting the molten iron to pure oxygen blasts. The output of this process is steel. Now, this process has been used for centuries and is considered to be the tried and true method of steel production. However, with environmental regulations tightening in the 21st century, various notes about the steel production process were made. Notably, this process is incredibly energy-intensive, generates significant C02 emissions, and has led to environmental pollution [3],[4].

This led to the subsequent creation of Electric Arc Furnaces (EAF) - an alternative to the BOF process. Unlike the BOF process, which requires blast furnaces to produce the molten iron, EAFs apply electrical energy to melt scrap metals. Because of its reliance on scrap metals, EAFs offer an environmentally friendly solution and reduce the dependency / availability on raw materials in their production process. This new technology is making significant headway in the steelmaking industry. In 2023, it was reported that 43% of planned steelmaking production was based on EAF technology, versus the 33% from 2022 [4],[5]. 

To reiterate the difference between BOF and EAF technology, BOFs will heat up the iron via coal (leading to it being less environmentally friendly), while EAFs create heat to melt scrap metals via electrical conduction. This is where Graftech fits into the picture. The company produces graphite electrodes, the primary material used in electric arc furnaces. The electrodes act as conductors of electricity within the furnace, which produces the heat to melt scrap metal [3]. So, from a bird’s eye view, Graftech sits in the middle of the supply chain; it does not provide the metal scraps or produce the steel itself, but rather sells the graphite electrodes to the steel producers. 

The second product that Graftech produces is petroleum needle coke products - a key raw material in the production of graphite electrodes. Specifically, Petroleum Coke is made from crude oil and is used as fuel or for inputs of other materials like graphite electrodes (and other carbon products). The specific production process is outlined below [4]:

1. Crude oil is heated and vaporized in a distillation tower to be separated

2. The heaviest cooled gas is sent to the vacuum tower to be further separated

3. Again, the heaviest material is then sent to a coker and heated at about 1000° F

4. The material solidifies, becomes petroleum coke, and is ground up for use. 

These steps are further outlined in Figure 1 below:

Once the petroleum coke is created, other additives are added, and the composition is heated to extremely high temperatures to produce graphite electrodes.

Petroleum Needle Coke and Graphite Electrodes represent the two products that Graftech produces. We will next look at the supply and demand trends within each segment (images of both these products can be seen below).

As of the end of 2024, the global (excluding China) graphite electrode industry had a nameplate production capacity of approximately 786 thousand metric tons (MT), with capacity highly concentrated among the top five producers—GrafTech, Resonac Holdings, HEG Limited, Tokai Carbon, and Graphite India—who collectively control around 82% of the market. GrafTech alone accounts for 178 thousand MT, or about 23% of total capacity, through its Calais (France), Pamplona (Spain), and Monterrey (Mexico) plants. Despite the global need, no new facilities have been constructed outside of China in recent years, with supply growth coming only from optimization and limited brownfield expansions - this is because China historically has been able to produce graphite electrodes at prices cheaper than those from other firms in the market. The tradeoff with China’s lower prices, however, is a greater defect rate in the produced graphite electrodes. Approximately 85% of global (ex-China) capacity is concentrated in the ultra-high power (UHP) segment (used for high-current, high-power applications), which is critical for electric arc furnace (EAF) steelmaking. Although China has greater total capacity than any other country, its fragmented production base and variable quality, combined with export barriers like U.S. and EU tariffs, limit its effective contribution to global high-end supply. On the demand side, UHP graphite electrode usage has averaged around 660 thousand MT per year over the past three years, driven by the rising share of EAF steel production. EAF steelmaking, now comprising 50% of ex-China steel production (up from 44% in 2015), is favored for its efficiency and lower carbon emissions. As EAF steel capacity continues to expand, demand for UHP graphite electrodes is projected to grow at a 3%–4% compound annual rate through 2029 [1],[2].

The global (excluding China) petroleum needle coke market remains highly concentrated, with four key producers—Phillips 66, GrafTech (via Seadrift, one of Graftechs crown jewel production facilities located in Texas), Petrocokes Japan Ltd., and ENEOS Holdings—collectively providing approximately 750 thousand MT of capacity as of the end of 2024. GrafTech’s Seadrift facility accounts for roughly 140 thousand MT, or nearly 20% of the total. Supply growth has been stagnant due to the capital intensity and regulatory hurdles associated with greenfield development. While Chinese capacity is expanding rapidly to support its domestic EV battery market, non-Chinese regions like North America and Europe face emerging supply-demand mismatches, particularly as EV manufacturers emphasize local sourcing. On the demand side, needle coke consumption for UHP graphite electrode production has averaged 550 thousand MT annually (ex-China), and is expected to rise in line with electrode demand at a 3%–4% CAGR through 2029. Meanwhile, demand for petroleum needle coke in synthetic graphite anodes for lithium-ion batteries is forecast to grow even faster, at over 20% annually, driven by the expanding EV market. Petroleum needle coke is preferred over pitch needle coke for both electrode and battery applications due to its lower impurity content and superior structural characteristics. As battery-grade graphite demand surges and regional sourcing pressures mount, North America and Europe are likely to face tighter supply conditions in the coming years [1],[2].

Graftech earns revenue by selling its two products under short-term purchase agreements, multi-year purchase agreements, and spot sales. The short-term agreements are on a quarterly, semi-annual, or annual basis. The price for short-term agreements are determined via contract negotiations, and is influenced by the standing price on spot purchase orders. The spot purchase orders are entered into with at least 3 months before delivery is due. The pricing for these contracts vary with demand and supply cyclicality. However, Graftech reports that the average price from 2005 to 2024 has been approximately $4000 per megaton. In Figure 3 an image of the spot price (in dollars per megaton) of graphite electrodes from 2011 to 2024 [1],[2]. 

The most significant trend in the graphite electrode industry since 2019 has been the sustained decline in prices. This downtrend began with the onset of the U.S.-China trade war in 2018–2019, during which tariffs and trade restrictions disrupted global steel and electrode trade flows. As China is the largest producer of steel and graphite electrodes, and the United States one of the largest importers, tariffs significantly reduced cross-border shipments and increased uncertainty in global procurement, pressuring spot prices. Just as markets were adjusting to these geopolitical frictions, the COVID-19 pandemic caused a severe demand shock in 2020, leading to a sudden drop in industrial production globally—including the steel sector, the primary consumer of graphite electrodes. This further weakened pricing power for electrode producers. 

Compounding these effects was the sharp rise in energy prices in Europe following the post-COVID recovery and the energy crisis worsened by the Russia-Ukraine war in 2022. Elevated electricity costs forced steelmakers, particularly in Europe, to curtail electric arc furnace (EAF) output, further dampening electrode demand. Meanwhile, global supply remained resilient due to legacy overcapacity, especially in China, where producers often continued to manufacture despite weakened global demand. This supply-demand imbalance, alongside long-term fixed-price contracts that GrafTech entered into during the 2017–2018 price peak, placed significant pressure on margins as spot prices fell below contract levels. The result has been a prolonged period of lower graphite electrode prices, now extending over five years, with the industry only beginning to show signs of rebalancing. Importantly, the prices are not at an all time low - but rather trading at its historical average pre-2018. The issue for Graftech, however, was that the company made significant investments during this period due to the price boom (this relates to their long-term agreements, which we will discuss shortly). However, the 2018 period represented an anomaly, and graphite electrode prices will likely not reach these highs agan. The price boom was primarily driven by a supply shortage, as in 2018, China’s production capacity reduced due to increased environmental regulations. This, paired in combination with increased demand for graphite electrodes as EAF steel production was gaining popularity, led to a price boom that Graphite relied on for profitability[1],[2].

Financial History

To get a full picture of the company and its current distressed situation, we must also look at key events that have led to its current financial position. The beginning of Graftech’s additional pressure can be traced back to its LBO in 2015, where it was taken private by Brookfield Asset Management for approximately $1.25bn (of this, $855mm of capital was provided via an equity financing from Brookfield, and the remaining $395mm was financed by debt). [8],[14],[15]. For reference, in 2015, Graftech reported Revenue of $533mm and EBITDA of $23mm. This amount was down from historical figures, with revenue exceeding $1bn in both 2013 and 2014. 

The take private, paired with the following events, led to a significant cash strain on the company. We have outlined each of these events below:

1. 2018 Tax Receivable Agreement: In 2018, Graftech and Brookfield entered into a Tax Receivable Agreement (TRA). A Tax Receivable Agreement (TRA) is a financial arrangement often established during an initial public offering (IPO), whereby a newly public company agrees to share certain tax benefits it realizes after the IPO—typically from pre-IPO assets like net operating losses (NOLs), depreciation, or amortization—with the former owners. In essence, the company receives valuable tax savings that reduce its cash taxes, but must remit a significant portion of those savings as cash payments to the pre-IPO shareholders, usually the private equity sponsor or founders. While these agreements are legally distinct from debt, they function similarly by creating fixed cash obligations that persist even during periods of weak financial performance. GrafTech entered into a TRA in 2018 in connection with its IPO, under which it is contractually obligated to pay 85% of the realized cash tax savings from the use of specific pre-IPO tax attributes to Brookfield, its former majority shareholder. These obligations are not nominal: the Company expects total payments to reach up to $70 million. Additionally, these payments accrue interest at a floating rate of SOFR+1.10%, which adds a compounding, debt-like burden [9]. 

2. Long Term Agreements: As we discussed earlier, Graftech's business model is broken down into three types of contracts: spot price contracts, short-term agreements, and long-term agreements. Graftech’s long-term agreements, which were primarily entered into from 2017 to 2019, have kept the company’s profitability afloat for a few years, but as these contracts begin to expire, they act as an additional source of pressure on Graftech’s bottom line. The LTAs that Graftech entered into with various customers were structured as take-or-pay contracts, an agreement where the customer is required to pay for a set quantity of goods, regardless of whether they actually want / accept delivery or use the goods. This type of contract can be extremely beneficial for the seller, as it adds a stable revenue source in volatile markets. When Graftech entered into these agreements, graphite electrode prices were at an all time high (see Figure 2). As a result, graftech was able to sell these contracts for an average price of $8,500 per MT (and these contracts typically had a life of 3 to 5 years). As graphite electrode prices fell in the years following 2019, Graftech was able to sell its product at a premium to what it could get on the spot market / via short term agreements. However, these contracts began to expire from 2023 to 2025, and Graftech’s revenue began to decline rapidly. This can be further demonstrated by looking at the sales from long-term agreements, where Graftech reported LTAs represented 41% of 2023 revenue vs 68% of 2022 revenue [1],[2]. 

3. Customer Relationships: The LTAs we discussed above were entered into with major steel producers, including Aperam and ArcelorMittal. These LTAs were designed to provide price stability and secure supply for graphite electrodes, a critical component in electric arc furnace steelmaking. However, following a significant drop in graphite electrode market prices in January 2020, both Aperam and ArcelorMittal initiated arbitration proceedings against GrafTech. They contended that the LTAs should be invalidated or modified due to the changed market conditions, arguing that the fixed prices were no longer tenable. The claimants sought approximately $188.2 million in damages, covering the period from the first quarter of 2020 through the first quarter of 2023. On March 14, 2024, the International Chamber of Commerce issued a final award in favor of GrafTech, dismissing all claims brought by Aperam and ArcelorMittal. The arbitrator ordered the claimants to pay approximately $9.2 million to GrafTech for legal fees and related expenses, while GrafTech was directed to pay around $60,000 to the claimants for their legal costs. Despite this legal victory, the enforcement of above-market LTAs strained GrafTech's relationships with some customers. As these contracts expired, several clients chose not to renew, leading to a loss of market share for GrafTech. The company's rigid adherence to the LTAs, while legally justified, may have impacted its ability to maintain long-term customer relationships in a volatile market [10].

The combination of these events, paired with a highly leveraged capital structure from the 2015 LBO led to pressure for Graftech in following years (by 2024, the company had $950mm in total debt, and over $400mm of this stemmed from the LBO in 2015). The company’s financial performance can be seen in Figure 4 below. Notably, the company’s EBITDA performance took a major decline in 2020, and again in 2023. The reasons for this coincide with our discussions above. The company's LTAs kept its revenue flat through 2022, but the company saw increased cost pressures following 2019 stemming from the trade wars, which led to the 2020 EBITDA decline. The 2023 EBITDA decline, as we discussed in depth above, was due to the expiration of Graftech’s long term agreements [1],[2].

By 2024, the company began to seek restructuring alternatives as it began to face a liquidity crunch. Graftech’s capital structure can be seen below (as of December 2023). It consists of an undrawn $330mm Revolving Credit Facility, $500mm of 4.625% Senior Secured Notes, and $450mm of 9.875% Senior Secured Notes. In the capital structure below, we have included two leverage ratios as well - based on 2022 and 2023 Adjusted EBITDA reports. From these figures, it is clear that the 2022 leverage understated the financial position of Graftech (due to the LTAs), but the 2023 leverage also likely represented an overstatement due to historically low EBITDA figures. In reality, the company would likely sit with a 10-15x leverage multiple assuming it generated EBITDA values of $50mm to $150mm annually. If we look back to 2017 (before the large price rise in 2018 followed by a rapid price drop in subsequent years), the reported EBITDA sat in this range, so it is likely that this is the company’s true cash flow generating ability (all else equal). The point of this analysis is to demonstrate that even if the company was generating EBITDA amounts before the price volatility, it would still be significantly levered, emphasizing the need for a restructuring to occur.

Structural and Legal Considerations

Based on the analysis done above, you might have noticed that we analyzed the company’s financial position as of the start of 2024. The reason for doing this is because the company actually engaged in an out-of-court restructuring transaction at the end of 2024. This section is meant to provide an in-depth analysis of the credit agreement, to provide an insight to the work that a restructuring investment banker will do in analyzing a company's options when in distress.

To do this analysis, we will be looking at the credit documents of the most recent issuance of bonds (which happens to be the 9.875% senior secured bonds) as well as the revolving credit facility. The reason for this is because, when analyzing credit documents, the company is going to be subject to the tightest terms of the debt that sits within the credit box. As a result, for Graftech, the tightest terms will be in the most senior piece of debt (i.e the RCF) and the newly issued bonds (as the newer bonds are more likely to feature tighter covenants given it was issued in 2023, when credit doc ‘tightness’ was heavily negotiated for in protection of the lenders). Additionally, while it is important to read a credit agreement cover to cover to understand the terms that govern the actions of a company, we are going to be focusing on the covenants, specifically the negative covenants. The negative covenants sections outline various restrictions on the company (such as restrictions on raising new debt or transferring assets), but it also has exemptions / carve-outs to these restrictions that govern the company's ability to raise debt, for example. For the purpose of calculations, we will be using the reported EBITDA amount as of the end of 2023, which equals to $4mm (this is the LTM that was referenced in all credit document sections).

The first section that we will look at is the Limitation on Incurrence of Indebtedness. Now, the purpose of this section is to limit the amount of additional debt that the company can incur. However, creditors cannot be overly restrictive (i.e, say that the company cannot raise debt at all), so they will outline various baskets / capacities that the company has that will allow them to raise debt, up to a certain point. The two ways a company can raise new debt will be via the Ratio Debt and the Permitted Indebtedness Exceptions. Looking at the former, the ratio debt covenant prohibits a company from raising debt unless a credit ratio has been met (and this ratio will be determined and outlined in the credit agreement). This ratio is typically a leverage ratio (defined as debt / EBITDA). However, in the case of Graftech, there is actually no ratio basket outlined in either credit agreement, and as a result, we will move on to look at the Permitted Indebtedness Exceptions. 

As the name suggests, the Permitted Indebtedness Exceptions outlines various carve-outs to the limitations on exceptions. These carve-outs are referred to as ‘baskets’ that the company can use to raise debt. Graftech’s credit agreement features multiple exceptions worth noting: we will look at each of these below. 

1. Credit Facilities Basket: The credit facilities basket is the foundation of the permitted indebtedness exceptions as it typically contains the largest carve-outs that a company can use to raise new debt. Depending on the credit document, this amount can be outlined in the indebtedness section, but more often than not, it is found in the definitions. Typically, it is titled “incremental amount”. For Graftech, the credit agreement states that the credit facilities basket is the sum of $400mm plus the aggregate amount of Term loans repurchased and repaid minus the sum of the aggregate principal amount of incremental debt outstanding. In a very detailed analysis, it is important to calculate the add-ons (like repurchased debt), but oftentimes it is best to just take the fixed component (so in this case $400mm) to be conservative in the debt capacity [11],[12]. 

2. General Indebtedness Basket: This can be thought of as a ‘catch-all’ basket for debt. It represents the debt that can be raised without having to meet any restrictions / qualifications (we will describe other kinds of baskets that do have to meet restrictions next). This is typically a fixed amount plus a ‘grower’ amount tied to the financial performance of the company. However, for Graftech, this amount is set at a fixed fee of $350mm [11],[12].

3. Non-Guarantor Restricted Subsidiary Basket: This basket is for debt that is being raised at a restricted subsidiary that is not a guarantor of debt elsewhere in the credit box. For Rackspace, this amount is the greater of $75mm and 7.5% of LTM EBITDA [11],[12].

4. Unsecured Debt Capacity Basket: This basket states the amount of unsecured debt the company can raise. Graftech has limited this amount to $50mm. Interestingly, the company included a variety of other restrictions associated with this debt. This includes that the debt must be subordinated on a payment basis to the notes (meaning they get paid out last / the maturity date must be after the secured notes maturity date). Additionally, the interest on the unsecured debt must be in the form of paid in kind interest, and the unsecured debt’s credit agreement cannot impose any sort of financial or maintenance covenants on the company [11],[12]. 

Below is a credit spread of the indebtedness section. As discussed, there are 4 baskets to pay attention to: the Incremental Debt / Credit Facilities Basket, the General Debt Basket, the NGRS Basket, and the Unsecured Basket. In the image below, we outline the total size calculations for both permitted debt capacity as well as structurally senior capacity - and this is a distinction worth noting. For permitted debt capacity, we simply calculate the sum of each of the 4 baskets aforementioned, which would equal an amount of $875mm. However, Graftech’s structurally senior debt capacity differs. For clarity, when we reference structurally senior debt capacity, this is debt that is being raised at either an unrestricted subsidiary or a non-guarantor restricted subsidiary. The reason debt at either of these two entities are considered to be structurally senior is because the assets at these entities do not guarantee debt held elsewhere in the corporate structure, meaning creditors who hold debt at an UnSub or an NGRS have a first claim to those assets. 

Now, the only basket that does not contribute to the total structurally senior debt capacity size is the Incremental Debt Basket. The reason is because the credit document for this basket states that the debt must be pari passu or worse in the capital structure to existing debt. So, if the ‘best’ outcome in terms of priority for the incremental debt is to be pari passu with other existing first lien debt, this means that the incremental debt must be raised at the same entity where the existing secured debt is, or must be raised at a guarantor subsidiary (under this situation, if a Holdco held the old 1L debt, and the incremental debt was raised at a guarantor subsidiary, they would still be pari passu because the subsidiary guarantees the debt at Holdco).

The next section that we will look at is the Limitation on Liens.  While the above section on permitted indebtedness outlines the ways a company can raise debt in general, the liens section (specifically the permitted liens) outline the amount of secured debt that a company can raise. To ensure this concept is clear, let’s take an example. Let’s say company A has $200mm in general debt capacity, but only $100mm in lien capacity. Even though it can raise $200mm in total debt, to raise secured debt, you need both debt and lien capacity. In this case, this means that only $100mm of secured debt can be raised. 

To understand the total lien capacity, we must first look at the Limitations on Liens section. At a first glance, it appears to be quite restrictive. As seen in the image below, Graftech states that it only has an allowance of raising liens that are a junior lien on collateral or permitted liens. This is why it is incredibly important to read a credit agreement in its entirety - Graftech lists its permitted lien exceptions out in the definitions section. As seen in the image below, the company outlines here that it has a general lien basket that has a size of the greater of $150mm and 15% of LTM EBITDA [11],[12].

The below image is a credit spread for the limitation on liens (calculating total basket capacity size). This is going to only look at the general lien basket, which has a total capacity of $150mm.

The third section that we will look at is the limitation on investments. This section seeks to limit the investments / transfer of cash and other assets from the company and its restricted subsidiaries to outside entities. This section is often looked at in tandem with the next section we will discuss, limitations on distributions and dividends, as both relate to the concept of restricted payments. Generally speaking, the Restricted Payments covenants seek to prevent value leakage outside of the credit box, where existing creditors will no longer have a claim to the assets that secure its debt. The restricted payments covenant allows two types of transfers of value: 1) investments in third parties and 2) transfers of value to outside creditors. In this section, we will look at the former. Like the limitation on liens, this section actually outlines its ‘permitted’ investments in the Definitions section of the credit agreement. 

The first investment basket that we will look at is the general investment basket. Like the general indebtedness basket, this allows for the company to invest assets into a third party / entity without any restrictions. For Graftech, this amount is outlined to be the greater of $250mm and 25% of LTM EBITDA [11],[12].

The next basket we will look at is the Joint Venture and Unrestricted Subsidiaries basket. Typically, these baskets are separated, but Graftech included both in this single basket size equaling the greater of $125mm or 12.5% of LTM EBITDA [11],[12]. 

The below image shows the credit spread for the investment capacity. This basket comprises the general investment capacity plus the capacity from investments in Joint Ventures and Unrestricted Subsidiaries. The former basket has a capacity size of $425mm, and the latter has a size of $125mm, equalling a total basket capacity for investments of $550mm.

The final section that we will look at is the Limitations on Dividends and Distributions. This section is broken down into 2 exceptions with regards to restricted payments: 1) the builder basket and 2) permitted payments. 

The builder basket is a ‘grower’ basket that outlines a fixed capacity of restricted payments, plus an amount that grows as the company's financial position grows as well. It is going to be found in the Definitions section of a credit agreement, defined as either “Cumulative Credit” or “Available Amount”. For Graftech, it is defined as the latter. Now, Graftech’s builder basket is unique in that it actually does not feature a fixed amount, but rather just the grower component (i.e, the company’s basket will be based on metrics like Net Income, so if the company ‘grows’, it can keep adding to its basket capacity). Specifically, the capacity under this basket is equal to the sum of a) 50% of Consolidated Net Income , b) returns, profits, distributions of the company, c) investments in unrestricted subsidiaries, d) the proceeds of a sale of any unrestricted subsidiary, e) dividends or other distributions not included in Consolidated Net Income, and f) any asset sale proceeds [11],[12]. For Consolidated Net Income, it is important to reference the credit document’s definition, as it contains a variety of add backs to net income that may not be included in the traditional net income calculation, and this can make a company that reports negative net income one year still report a positive Consolidated Net Income amount. If a company does report a negative Consolidated Net Income, however, that amount will just be equal to 0.

The second component of this section is the permitted payments. The first exception outlined is a general restricted payments basket, which equals the greater of $125mm and 12.5% of LTM EBITDA [11],[12].

The below image shows the credit spread for the restricted payments basket. This amount equals the sum of the builder basket and the general restricted payments basket. As a reminder, the builder basket for Graftech only consists of the grower component (no fixed amount). As a result, for simplicity, we assume this to be zero. For clarity, if one were to calculate the builder basket capacity, you follow the steps outlined in Figure 15 - Consolidated Net Income plus returns, profits, or distributions in cash plus investments made in any unrestricted subsidiaries plus the cash from the sale of an unrestricted subsidiary plus any dividends / distributions from an unrestricted subsidiary plus the proceeds from an asset sale. To avoid confusion, we will not be going through this possible confusion, so assuming the total builder basket size is equalled to 0, the total size of the restricted payment basket equals $300mm.

Below, we have attached a complete credit spread of this analysis. In this spread, the specific calculations were done based on the basket capacities outlined above to determine Graftech’s total ability (in dollars) to raise debt, make investments, and transfer assets. As seen in the figure below, the company has the ability to raise $475mm in structurally senior debt capacity (i.e the debt is raised at an unrestricted subsidiary or at a non-guarantor restricted subsidiary), 

Additionally, of the $475mm of structurally senior debt the company can raise, $150mm of that debt can be secured debt. This is because there is only $150mm in lien capacity. As a reminder, the limitation on indebtedness is a broad category for how much debt can be raised, but that must be paired with the limitation on lien capacity to determine how much secured debt the company can raise. This does bring up an important note: just because the company can currently only raise $150mm in secured debt at either an unrestricted subsidiary or a non-guarantor subsidiary, this capital raise can still be enticing to creditors who would be unsecured. Because the new subsidiary does not guarantee any debt, the unsecured holders at this entity would still sit ahead of any secured debt at a Holdco, for example, in terms of payment. 

Finally, Graftech has the ability to transfer $850mm of asset value (sum of permitted investments and restricted payments capacities) outside to either an unrestricted subsidiary or a non-guarantor restricted subsidiary.

Overview of Effectuated Transaction

In November 2024, GrafTech executed a debt restructuring to enhance liquidity and extend its maturities. The company secured $175 million in new senior secured first lien term loans and obtained commitments for an additional $100 million in delayed draw term loans, both maturing in December 2029 with interest at SOFR plus 600 basis points. To simplify its capital structure, GrafTech launched an exchange offer for its $950 million of outstanding senior secured notes due 2028, proposing new second lien notes due 2029 with the same interest rates (4.625% and 9.875%), alongside a consent solicitation to eliminate most covenants and release collateral securing the existing notes. Additionally, the company replaced its $330 million revolving credit facility maturing in May 2027 with a new $225 million first lien revolver maturing in November 2028, subject to a springing maturity and a $15 million cap until all term loans are drawn. These transactions, supported by Barclays and lenders holding over 81% of secured bonds, increased GrafTech’s liquidity from $254 million to $529 million as of September 30, 2024 [13]. The below image is a bridged capital structure that shows the pro forma debt outstanding.

Now, given that this was an out-of-court transaction, not much information beyond that found in press releases was disclosed about this deal. However, given the information, we can develop an educated hypothesis around how the credit documents that we analyzed were used to create this out-of-court transaction. As stated in the previous paragraph, the company raised $275mm in new financing ($175mm of a new senior secured term loan and another $100mm in a delayed draw term loan). This capacity came from the structurally senior debt capacity, which we calculated to be equal to $450mm. 

The next component of this transaction was the debt exchange, which featured the 4.625% and 9.875% secured notes being exchanged into second lien notes (sitting only below the $275mm in first lien term loans).

Broadly, there are two ways an exchange like this could have occurred. First, the company could simply have gone to these secured noteholders, and asked them to exchange this debt into new debt that would still be held at the entity it was initially issued at. However, there is an issue with this structure (from the perspective of the secured noteholders). For them, it would not make sense to engage in a transaction like this. This is because it was reported that the $275mm in new financing was issued at a new entity (either a non-guarantor restricted subsidiary or an unrestricted subsidiary). This means that if the pre-existing noteholders exchanged their debt at its current entity, the company could still have the capacity to raise new debt at this unrestricted subsidiary or NGRS (where the $275mm is held), and this could would technically make the secured notes subordinate to any secured debt held at this new entity. The reason the secured notes would be subordinate to any other secured debt held at this entity is because the assets are held at the NGRS. Because the NGRS does not have to guarantee the debt at a different entity, the debt at the NGRS is closest to the assets and will have the only claim on them, hurting the exchanged secured notes position.

As a result, it is likely that this exchange transaction occurred by having the secured noteholders exchange their debt into new debt that is also held at the new unrestricted subsidiary / NGRS. This way, in the new credit documents for the noteholders, they can specify that no new debt can be raised at this new entity if that debt is senior to the noteholders. In order to effectuate a transaction like this, the company would need to have asset value at the new unrestricted subsidiary / NGRS. For this, it likely used the $850mm of capacity to transfer asset value to a new entity. In Figure X earlier, we calculated the Enterprise Value of the business to be around $1.2bn, so this $850mm represents a substantial portion of Graftech’s business. This hypothesis of asset value being moved to the new entity is further supported in news releases, where it states that the noteholders came together to release all / substantially all of the collateral held at the old entity that initially issued the debt. As some may have noticed, the exchanged debt (at the new subsidiary) is a total amount of 498+446 = $948mm, and this amount is greater than the assets that can be transferred to the subsidiary. Additionally, this does not include the new $275mm of senior secured debt that was raised at the new subsidiary as well (totalling over $1.2bn). As a result, for a transaction like this to make sense for the debtholders, more value than the $860mm would have to be moved. In a situation like this, credit documents will state that the company needs to have a certain lender consent (like 50.1% or 66.67% of creditor consent) to amend the documents. In Graftechs case, this amount was 66.67% (nearly 100% of the noteholders agreed to this deal, so getting to this consent amount was not an issue). What this enabled the lenders to do (which happened to be all of the pre-existing holders of the secured notes), was amend the underlying dockets to increase the capacity and ‘release’ all the collateral, such that effectively the entire value of the business could be moved to this unrestricted subsidiary. 

Assuming that this transaction is the one that Graftech used (rather than possibility #1), we can now add more clarity to the pro forma capital structure in Figure 20. In terms of priority, despite both the $275mm of newly issued loans and the exchanged notes both being secured at the new unrestricted subsidiary / NGRS, the $275mm are still senior to the exchanged notes (this is because of an agreement from the exchanged notes to allow debt to be issued senior to them). The revolving credit facility sits below all both pieces of debt, assuming it is held at the Holdco entity. There are two points worth noting with regards to this. First, the reason that the newly issued loans had to be senior to everything else in the capital structure is because Graftech is highly distressed, so no lender would be willing to provide capital unless they can be put at the top of the capital structure (and thus minimize downside in the case of a bankruptcy, where they may not get a full recovery). Secondly, it may appear like there is no difference between the exchanged notes sitting at the new entity vs. the HoldCo - after all, they still are being repaid after the new term loans. To reiterate, the reason having their debt exchanged at the new entity is advantageous is because it prevents further downside if the company were to have raised debt at the unrestricted subsidiary / NGRS in the future.

At this point, it is too early to tell whether or not this restructuring transaction will prove effective. The company reported that the restructuring increased its liquidity to over $500mm, which should provide a decent runway to turn around the business. Regardless of whether or not this restructuring proves to be successful, however, this paper emphasizes the importance of understanding a company's credit document. At the end of the day, a credit document governs a company's actions, and in a distressed situation, a credit document that offers flexibility (like Graftech) can be a pathway to effectuating a restructuring that initiates the turnaround of a company.

Sources: [1],[2],[3],[4],[5],[6],[7],[8],[9],[10],[11],[12],[13],[14],[15]

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