Leon Black’s Bid Entices NewPage Bondholders: Corporate Finance

Leon Black
Leon Black, chairman and chief executive officer of Apollo Management LP. Photographer: Jonathan Alcorn/Bloomberg

NewPage Corp. debtholders are betting Leon Black’s Apollo Global Management LLC will raise its bid to obtain control of the paper maker instead of letting the firm emerge from bankruptcy and compete with Verso Paper Corp.

First-lien bondholders of the largest U.S. coated-paper maker, which include BlackRock Inc. and JPMorgan Chase & Co., turned down a deal that would have given them 83 cents on the dollar, according to a July 3 regulatory filing from Verso, which is controlled by Apollo. NewPage’s $1.77 billion of 11.375 percent bonds traded at 69 cents on the dollar at 9:56 a.m. in New York today, above the 48 cent value that JPMorgan put on the company if it were to emerge as an independent business.

Verso, which has posted net losses for nine straight quarters, and NewPage are struggling through the fourth year of declining demand for magazine paper. Apollo, which also owns second-lien debt in NewPage, offered as much as 103 cents on the dollar in May before lowering its proposal because of declining earnings and cash at the paper maker.

“It’s too attractive an opportunity for Verso to let go,” Amer Tiwana, a Stamford, Connecticut-based analyst at securities broker and research firm CRT Capital Group LLC said in a telephone interview. “This is also a way for Apollo to salvage an investment in both NewPage and Verso, and Apollo is smart and will do this at any cost. It would seem we’re headed in the direction of a higher offer and a combination of the two companies.”

New Proposal

Under the latest proposal, the holders of the senior secured notes would get $1.08 billion of new Verso debt, $150 million of equity and $200 million in cash. That compares with a previous offer of $1.31 billion of new notes, $146 million of common stock in exchange for 10 percent of the first-lien notes and $300 million in cash, according to the filing.

The latest bid posed “significant downside risks” for its “stakeholders,” workers and business, Miamisburg, Ohio-based NewPage said in a July 3 statement.

Robert Mundy, chief financial officer of Memphis, Tennessee-based Verso, didn’t return a phone call seeking comment on the bids, and Shawn Hall, a spokeswoman for NewPage, declined to comment.

“A Verso and NewPage combination and the expected synergies of $125 million to $150 million would allow for Verso to pay a higher price than currently offered,” Tiwana said. “The combination makes sense given the synergies and the ability to rationalize capacity in a secularly declining market.”

Paper Prices

The price of coated freesheet paper, one of the main kinds made by NewPage, has dropped to $975 a ton, down 3.9 percent from a year ago, according to a June report from debt researcher CreditSights Inc.

“Demand for coated paper has been down about 5 percent every year since 2008,” Ed Sustar, a Toronto-based analyst at Moody’s Investors Service said in a telephone interview. “If you’ve got producers disciplined in managing supply, they should generate free cash flow. Both NewPage and Verso should be able to coexist and survive.”

Moody’s rates Verso B2, five levels below investment grade, while Standard & Poor’s maintains a B grade on the company. Ratings on NewPage were withdrawn by both firms after the paper maker filed Chapter 11 protection in September.

“NewPage went into bankruptcy with way too much leverage,” Sustar said. “Given the secular decline of coated paper, it needs a strong balance sheet.”

Bankruptcy Filing

NewPage listed $3.4 billion of assets and $4.2 billion in debt when it filed for bankruptcy protection. The company had been unprofitable since 2006, as reduced demand from magazines and advertisers weighed on prices for coated paper and the cost of materials such as wood and pulp increased, according to an Aug. 15 regulatory filing.

Bondholders would recover a significant amount in a liquidation, Scott Colyer, chairman and chief executive officer of Advisors Asset Management Inc. in Monument, Colorado, said in a telephone interview. “There should be plenty to cover the first-lien bonds, even if the company’s assets were worth half of what they filed for.”

The company, which had been part of MeadWestvaco Corp., was bought by New York-based Cerberus Capital Management LP for $2.3 billion in 2005 and issued $900 million in junk bonds to fund the purchase. In the last quarter before NewPage filed for bankruptcy, its interest expense of $96 million topped its $24 million of earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg.

Debt Exchange

Apollo, the New York-based buyout firm, purchased Verso, a former unit of International Paper Co., for $1.4 billion in August 2006. Its stock has fallen 87 percent to $1.51 since the buyout firm took it public in 2008, Bloomberg data show. In May, Verso reduced its debt by exchanging $104.7 million of secured bonds for $157.5 million of subordinated notes, a trade S&P considered to be tantamount to defaulting on the debt.

“Verso is almost assured of bankruptcy at some point in time, unless they figure out a way of their mess,” Colyer said.

Verso’s $271.6 million of first-lien 11.75 percent bonds due in January 2019 last traded at 81.5 cents on the dollar to yield 16.5 percent on July 3, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Its $396 million of 8.75 percent second-lien notes due in February 2019 fell 1.5 cents today, to 42 cents on the dollar to yield 29 percent, Trace data show. The second-lien bonds are off a year low of 34.5 cents on June 5.

‘Stronger Business’

“Verso second-liens and subordinated bonds are moving higher because there’s upside to a merger because total leverage will fall and there’s a strong chance through this deal they’ll try to be taken out through a discounted exchange,” Rahul Gandhi, a London-based analyst at debt researcher CreditSights Inc., said in a telephone interview.

Black, who worked at junk-bond firm Drexel Burnham Lambert Inc., spent most of the last decade buying companies with billions of dollars in debt and selling them at a profit, including a $30.7 billion takeover for Harrah’s Entertainment Inc., the world’s biggest casino operator, and Realogy Corp., the biggest broker of residential real estate in April 2007.

A combination with NewPage would create “a stronger business in the global coated and supercalendered paper industry” due to cost savings, Verso said in the July 3 filing. Verso said it withdrew a May 30 term sheet that did not reflect NewPage’s latest earnings and cash balance.

“Is it quite likely that Verso comes back with a fatter offer? The answer is yes,” Colyer said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE