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Chemours headed for bankruptcy, short seller says

Liability related to perfluorooctanoic acid may overwhelm the DuPont spin-off

by Alexander H. Tullo
June 9, 2016 | A version of this story appeared in Volume 94, Issue 24

Credit: DuPont
Chemours inherited DuPont’s environmental liability related to PFOA at this site in Parkersburg, W.Va.
An aerial view of chemical plant in Parkersburg, W.Va.
Credit: DuPont
Chemours inherited DuPont’s environmental liability related to PFOA at this site in Parkersburg, W.Va.

An influential short seller, Citron Research, has issued a report saying the DuPont spin-off Chemours may go bankrupt within the next 18 months under the weight of anemic cash flows, high debt, and environmental liability.

To short a stock is to bet that its price will dramatically decrease. Firms such as Citron that specialize in shorting stocks often attempt to influence the market by putting out damning reports meant to scare investors.

Citron’s report focuses mostly on Chemours’s potential environmental liability related to perfluorooctanoic acid (PFOA) contamination at DuPont’s former Parkersburg, W.Va., manufacturing site. Chemours has indemnified DuPont from the PFOA liabilities and is on the hook for judgments and settlements related to PFOA as well as for other expenses, such as medical monitoring. The DuPont spin-off currently faces 3,500 mostly personal injury lawsuits.

The short seller believes Chemours’s total liability may exceed $5 billion. That sum is on top of the nearly $4 billion in debt Chemours has on its books. Given the firm’s before-tax earnings of $573 million last year, Citron says the burden is unsustainable.

Furthermore, Citron accuses DuPont of setting up Chemours for failure. It compares Chemours to Solutia and Tronox. Both of these chemical firms were spun off—from Monsanto and Kerr-McGee, respectively—with heavy liabilities that forced them into bankruptcy. “The gambit,” Citron’s report says, is to “create a bad entity that is designed to fail, so the good entity can be spared the reputational and liability damage.”

In its rebuttal of the Citron report, Chemours says it will reduce annual costs by $200 million this year and hopes to improve profits by $500 million by 2017. It is also conducting a strategic review of its chemical solutions unit, which generated about $1.1 billion in sales last year.

Chemours’s shares tumbled by about 10% the morning of June 2, the day the report was released. But they recovered in value by the end of the day.



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