GrafTech Sketches a Path to Safety

GrafTech's position post-restructuring, poised to tackle potential demand fluctuations goes to show the effectiveness of out-of-court scenarios.

Business Model Primer

The name of GrafTech’s trade is special carbon materials used to make steel. The main product here is graphite electrodes; these are long, solid rods of ultra pure graphite (graphite being the main component of a pencil, but of course, GrafTech’s specialized business unit doesn’t apply to that). 

To understand the importance of a graphite electrode in the steel creation process is to understand what an electric arc furnace is (EAF). 

Steelmakers melt scrap metal using huge electric currents, as shown above; graphite electrodes are the tool in which that electricity is carried. 

So…. what makes them different? In a market like this, it’s very easy for a product to be commoditized, with players really only competing on price, as the switching costs are not very high. Graphite electrodes are usually standard make, meaning the integration into your EAF is quite simple. However, there’s an extra step here: Needle Coke. Now, this isn’t a byproduct/alternative of what some were adding into a 1920s Coca-Cola formula, needle coke is a high-strength carbon material that looks like long, needle-shaped crystals (pictured below). This is the key ingredient used to make graphite electrodes. 

Needle coke is produced from petroleum derivatives and sometimes coal tar pitch (a thick, black residue left after coal tar is distilled; used in paving and roofing). However, you need high-temperature ovens, a controlled carbonization cycle, and extremely pure feedstock (oil byproduct can’t have any contamination). Thus, most companies within the space purchase their needle coke supply, since the entire process is capital intensive, and very few can justify the cost of having this production line in-house…… unless your name starts with a ‘Graf’ and ends with a ‘Tech’. Over a two year period from 2010-2011, GrafTech went on an acquisition spree, buying up five companies, one of which named Seadrift Coke LP. Seadrift made petroleum coke, which is an umbrella term for needle coke (grade of pet-coke). 

Making needle coke internally allows them to scale at lower costs, have higher supply control, and increase their pricing power for larger-volume orders. Their competitors have to buy needle coke on the open market, which often is volatile to larger oil markets, and poses a problem similar to polyethylene extrusion companies: lack of prediction power leaves very little wiggle room for operating profit. With larger volume contracts and long-term supply agreements (LTAs), GrafTech can lock in volume and prices with steelmakers, making it extremely beneficial for their customers to actively choose them. 

What happened?

For a company that seems to take up a huge part of the value chain, it doesn’t make sense as to why it’d be in a position to warrant an out-of-court restructuring. However, there are two types of ways to make steel: the basic oxygen furnace, and the electric arc furnace. As seen, the electric arc furnace itself is a tad limited, since it uses scrap metal to create finished products, so the market is not nearly as developed. For players who thrive in this space, it comes down to scale, as smaller players are affected adversely by spot price volatility.   

GrafTech used to derive a huge chunk of its sales from LTAs, which locked in high prices and guaranteed minimum volumes. This proportion existed due to a 2017 crackdown on China’s electrode industry. A ‘blue skies’ initiative pushed the Chinese government to shut down graphite electrode production, and as such, global capacity was around 800k MT, and plants were running near 90% capacity utilization (total production ran around 720k MT). EAF steel demand did not drop, however, so with constrained electrode capacity, LTAs made sense. They guaranteed volume in a scarce market, but they also commanded a premium for this supply. Their main issue was that they were multi-year, so even if supply picked up, LTAs would need to be honored.  

The contracts worked great until China began to pick up its electrode supply.

GrafTech themselves cited “global electrode oversupply” as a reason for earnings misses, but the bigger picture can be summed up into two things: 

1. China’s Blue Skies initiative was meant to axe small/high-emission plants, ultimately streamlining production to larger players

   
   

2. With domestic EAF demand curtailed due to fear of future government involvement, Chinese electrode producers looked to expand into imports.

Import pick-ups can be seen in 2022, as China ramps up production. Companies such as GrafTech, already operating at insanely high capacities due to previous market shortages and impending LTAs, simply weren’t ready for their customer’s to switch. Non-LTA spot prices began to drop, and spot-volumes began to spike. Every dog has its day, and the sun was setting on the hounds at GrafTech. 

Chinese electrode supply picked up, and that export valve unlocked a wave of volume that kept spot prices under strain. As LTAs began to expire, GrafTech had no other choice but to enter the spot market, to which they were still supplying at high volumes, but at comical prices. There was simply no reason to even work at this scale, especially with such capital intensive vertical integration with Seadrift. Not to mention, Chinese competitors simply had better access to feedstock for electrode production, making GrafTech's vertical integration a thing of the past.

GrafTech's Response

Before sales volume picked up, they dropped: 2023 sales volumes fell 39%, and production volume fell 44%. In 2022, adj. EBITDA went from $536m to only $20m in 2023. By Q4 2023, adj. EBITDA fell into the negatives by ~$22m, and the company was loss-making, driven by lower realized prices. 

As such, management cut fixed costs and capacity, launching an initiative called “cost rationalization and footprint optimization”, and suspended production at their St. Mary’s plant and other facilities, taking stated capacity down to only 178k MT going into 2024. Early 2024 created further capacity curtailments across Monterrey, Calais, and Pamplona, quoting “persistent softness in the commercial environment”. Adj. EBITDA dropped along with credit ratings, going from an already concerning high-yield bond territory all the way to a D rating from the S&P. 

They’re screwed, but they haven’t stepped foot into a courtroom!

In July 2024, press reported that the company was exploring options for raising money as “losses mount”. The company stated that they were exploring options for raising new capital amid 2027/2028 maturity walls, and with limited access to the capital markets (ratings downgrade and SP decline), an out-of-court solution was deemed the best approach. 

Management negotiated a commitment and consent letter with 100% of existing revolving lenders and an ad hoc group holding >81% of secured notes. 

Key Players

In the Company Corner, we have GrafTech’s management - CEO Tim Flanagan and CFO Rory O’Donnell, with Evercore as their financial advisor through the LME, and Kirkland and Ellis as company counsel. In the Creditor Corner, there was a split into two groups:

1. Noteholders/New Money

   1. Ad hoc group of secured noteholders (held >81% across both note series)

   2. PJT Partners as financial advisor, with Davis Polk & Wardwell as counsel, GLAS as admin/collateral agent for the new first-lien term loans

2. RCF lenders

   1. Existing revolver bank group. Simpson Thacher & Bartlett as their counsel

Before the transaction, GrafTech’s capital structure was tight, top-heavy, and running out of room. The company had a 330 million dollar secured revolver maturing in 2027 and nearly one billion dollars of senior secured notes due in 2028, split between 500 million dollars at 4.625 percent and 450 million dollars at 9.875 percent. All of this debt sat at the top of the secured stack with strict covenants, while liquidity was shrinking and full-year 2024 EBITDA was roughly 2 million dollars. As results deteriorated through early 2024, the company hired Evercore and Kirkland, and rating agencies began highlighting the fact that the 2027 and 2028 maturities were not realistically refinanceable in the market.

By late 2024, GrafTech and its creditors had moved quickly to a comprehensive out-of-court fix. In November, the company signed a commitment and consent letter with all RCF lenders and an ad hoc noteholder group controlling more than 81 percent of the outstanding notes. They agreed to replace the old revolver with a new 225 million dollar first-lien facility, raise a 275 million dollar first-lien term loan package (175 million drawn at closing and a 100 million delayed-draw tranche), and exchange more than 99 percent of the old 2028 secured notes into new second-lien notes due 2029. The old notes became subordinated from a lien perspective, their collateral was released through the consent process, and almost all restrictive covenants were stripped out. Once the exchange offers formally launched on November 21, participation was overwhelming. By late December, the new first-lien facilities closed, the old revolver was refinanced and terminated, and liquidity increased from 254 million dollars to roughly 529 million dollars. Q4 filings confirmed the capital restructuring, the doubled liquidity, and debt modification and extinguishment charges recorded for the year.

The reason this stayed out of court is simple: the stakeholders had the alignment, time, and incentive to make it happen. With more than 81 percent of noteholders and 100 percent of RCF lenders on board, the company had the votes to amend and strip the old indentures, removing almost all holdout power. GrafTech also had enough liquidity left to run a full exchange process without tripping an immediate default, which preserved optionality. Most importantly, both management and creditors saw real value in avoiding a Chapter 11 that would have damaged customer confidence, invited DIP financing and court fees, and risked operational disruption in an already stressed industrial niche. The out-of-court solution was faster, cleaner, and protected more value than a contested in-court restructuring ever could.

Lenders ultimately supported the out-of-court deal because it offered better value, faster execution, and far more control than a Chapter 11 process at a time when GrafTech’s fundamentals were extremely weak. With full-year 2024 adjusted EBITDA at roughly 2 million dollars and leverage very high, a bankruptcy filing could have forced deep haircuts or equitization on the secured notes if performance slipped even further. The exchange allowed holders to roll almost all principal into new second-lien notes at the same 4.625 percent and 9.875 percent coupons, extend maturities to 2029, and avoid an immediate mark to market loss or a valuation fight in court.

A Chapter 11 filing also risked permanent damage to the business. GrafTech operates in a cyclical, capital intensive sector where customer confidence is critical. A filing would likely have resulted in lost volumes, weaker pricing, supplier disruption, and deterioration in plant operations, all of which would reduce collateral value. The negotiated out-of-court solution preserved commercial stability, avoided DIP financing and heavy advisory fees, and kept the operating footprint intact.

The ad hoc group’s position further strengthened the case for an out-of-court approach. With control of more than 81 percent of the notes, the group could drive the exchange through consent thresholds, neutralize smaller holdouts, and secure a cleaner second-lien structure with improved documentation. Direct involvement with PJT and Davis Polk ensured that creditors shaped the outcome rather than relying on a court-driven process that could produce an unpredictable result.

The new money component provided additional incentive. Investors who supplied new term loan and DDTL capital received first-lien exposure with strong collateral protection and attractive economics. Even noteholders who did not participate in the new money benefited from a more stable capital structure and greater protection of their new second-lien notes.

The most practical advantage was speed and certainty. GrafTech still had cash and revolver availability, which allowed lenders to conduct a fast, high participation exchange with minimal execution risk. A Chapter 11 restructuring would likely have taken 9 to 18 months and involved litigation, valuation disputes, intercreditor challenges, and significant frictional costs.

In the end, lenders traded a modest level of structural seniority, moving below the new money tranche, in exchange for preserving principal, maintaining secured status, extending maturities, and avoiding a costly and value destructive bankruptcy in a very weak operating environment. This made the out-of-court transaction the clearly superior option.