Black’s NewPage Retreat Inflicts Bond Losses: Corporate Finance

NewPage Corp. bondholders, speculating the company needs no help in boosting earnings in a hobbled paper market, have seen the value of their holdings dwindle by $690 million since turning down a buyout offer in May from a rival controlled by Leon Black.

The largest U.S. coated-paper maker’s $1.77 billion of

11.375 percent notes due December 2014 fell 4.5 cents yesterday to 64 cents on the dollar. A day earlier Verso Paper Corp. said it ended merger discussions with the Miamisburg, Ohio-based company. That was the biggest drop since March and put the bonds, which touched 60 cents, further below the estimated 103 cents Verso offered in May.

NewPage, which filed for bankruptcy in September after posting 11 straight quarterly losses, is struggling to boost earnings as demand for coated paper has been declining about 5 percent to 6 percent annually, according to Moody’s Investors Service. First-lien bondholders have been negotiating a plan of reorganization with the company after it said that unsecured creditors are “hopelessly out of the money.”

“First-lien holders should have taken that deal because the recovery value down the road is both lower and riskier because creditors will likely be compensated with a greater portion of equity,” Kevin Cohen, a New York-based analyst at Imperial Capital LLC, said in a telephone interview. “They probably misjudged their negotiating power and the desperation, or the lack thereof, of Verso.”

Attempted Buyout

Verso ended attempts to negotiate an acquisition with NewPage and its creditors, saying it would instead focus on “internal growth projects,” the company said in a Sept. 4 statement. New York-based buyout firm Apollo Global Management LLC controlled by Black purchased Verso, a former unit of International Paper Co., for $1.4 billion in August 2006.

Amber Best, a spokeswoman for NewPage, didn’t immediately return a phone call seeking comment.

Verso offered the holders of NewPage’s first-lien debt the equivalent of about 83 cents on the dollar in new Verso first-lien notes, common stock and cash, it said in a July 3 regulatory filing. NewPage said the offer “posed significant downside risks to its stakeholders, employees, and business” and that it didn’t expect to continue discussing the proposal.

The July proposal replaced a higher offer from Verso in May, when the company offered about 103 cents on the dollar, according to the filing.

Paper Prices

“There would have been a lot of benefits of combining NewPage and Verso,” Ed Sustar, a Toronto-based credit analyst at Moody’s, said in a telephone interview. “Now those companies are going to have to make it work on their own.”

Both coated mechanical and freesheet magazine and catalog paper have declined in price since year-end, according to data from forest product researcher RISI Inc. Coated mechanical paper cost $860 per short ton last month, down from $885 in December, while freesheet paper dropped 3 percent to $970 in the same period. Coated mechanical prices increased $15 per ton in August.

NewPage, 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 high-yield, high-risk 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.

Recovery Value

NewPage, which is 80 percent-owned by Cerberus, listed assets of $3.4 billion and debt totaling $4.2 billion in the Chapter 11 reorganization. Liabilities included $232 million on a revolving credit plus $1.77 billion on the first-lien notes. Second-lien obligations included $802 million in 10 percent secured notes and $225 million in floating-rate notes.

Creditors may be better off without a combination that would have required additional financing, according to Scott Colyer, chief executive officer of Monument, Colorado-based Advisors Asset Management Inc.

“The NewPage first-lien bondholders will probably get close to 100 cents on the dollar,” Colyer, whose firm oversees $7.4 billion including the debt, said in a telephone interview.

Shuttering Capacity

Waiting until the company emerges from bankruptcy instead of accepting Verso’s proposals will probably result in a higher valuation for NewPage bondholders, Hoai Ngo, an analyst at Oppenheimer & Co. in New York, said in a telephone interview.

To get a better valuation “you could shutter capacity, which they really haven’t done yet,” which would improve Ebitda margins, Ngo said. “NewPage bondholders are waiting for a higher valuation, and that will probably come post-reemergence from bankruptcy. They can wait.”

Verso’s $271.6 million of 11.75 percent secured notes due in January 2019 rose 0.3 cents at 11:27 a.m. in New York to 79 cents on the dollar to yield 17.3 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. NewPage’s 11.375 percent debt is trading 7 cents more than its record low of 57 cents reached on Feb. 16.

The company filed a proposed reorganization plan and a motion for an extension for filing a disclosure statement explaining the plan on Aug. 14. The proposal contains an option under which there would be settlement of claims by the unsecured creditor’s committee challenging the validity of liens held by first-lien lenders. Alternatively, the plan would forgo settlement, allowing a lawsuit on lien validity to continue after the company emerges from bankruptcy.

“We ultimately believe that when NewPage emerges from bankruptcy they will link up with Verso,” Imperial Capital’s Cohen said. NewPage would probably get a lower valuation in any merger because a bankruptcy plan approved by a judge would likely lower the expectations of first-lien holders, he said.

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