Apollo-Backed Verso Finds Its NewPage Deal Is a Tough Sell

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Verso Corp., the paper maker controlled by Apollo Global Management LLC, is struggling to convince its creditors that acquiring its biggest rival would allow it to survive in an era of Kindles and iPads.

Six months after Verso bought NewPage Corp., the company’s bonds have lost almost half of their market value as declining sales of printed magazines and catalogs erodes the outlook for its business. The slide was exacerbated last month by a tight-lipped financial-disclosure policy that left bondholders wondering if the company would make $79 million of interest payments this week.

After complaints from analysts, Verso, which plans to pay the coupons due Wednesday, said it’s striving to give “meaningful, timely disclosure.” While its highest-ranking bonds have stabilized after falling as low as 55.5 cents on the dollar, the complicated relationship with NewPage is only adding to the longer-term challenges from the paper business.

“It could be that they get through this coupon, but if coated-paper demand stays very weak this year, compounded by competition from imports, then Verso and other coated players could start to lose pricing power, which could be indeed be a real bad hit on the operations and cash flow,” Rahul Gandhi, an analyst at research firm CreditSights Inc. in London, said by e-mail.

‘Big Ship’

Some analysts are taking a more optimistic view, saying Verso just needs time to absorb NewPage and realize planned cost savings.

“It’s a big ship to turn around and you’ve gotta be a little bit patient, which unfortunately the Street is not,” said Howard Bryerman, a debt analyst at Penn Capital Management Co., whose firm owns Verso bonds. “To put these two companies together and make it stronger from an operating standpoint makes a lot of sense. I’m willing to give them time to play out.”

Verso’s $417.3 million of 11.75 percent first-lien bonds due January 2019 have fallen to 59 cents from 87 cents on May 18, raising their yield to 32.1 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They closed as low as 55.5 cents on July 8. Its $271.5 million of so-called 1.5-lien bonds, which have less of a claim on collateral, plunged to 29 cents on June 25 for a yield of 65 percent from 61 cents, Trace data show.

The debt came under further pressure in June when Robert Mundy, then the company’s chief financial officer, left to take a similar role with Packaging Corporate of America.

Inadequate Disclosure

Bryerman said inadequate disclosure about Verso’s operations and ability to tap NewPage’s credit line during a May 19 earnings call triggered the bond selloff.

“Verso fully expects to make the interest payment,” said Kathi Rowzie, a spokeswoman for the Memphis, Tennessee-based company. “Verso strives to provide meaningful, timely disclosure to all our investors.”

Bryerman and Standard & Poor’s analyst Jim Fielding said the company has enough cash and borrowing ability to service its debt through January. They said it would be able to use revolving credit at NewPage, acquired in January for $1.4 billion.

After losing money in five of the six years since Apollo’s $1.6 billion purchase from International Paper Co. Verso bought less-indebted NewPage, a former MeadWestvaco Corp. unit. Its ability to achieve a targeted $175 million in cost savings by combining the businesses may be key for the long term, said Ed Sustar, an analyst at Moody’s Investors Service.

‘Constant Challenge’

“A big portion of how successful the company will be is how well they can integrate,” Sustar said. “The ongoing industry of coated paper has a constant challenge, every year there’s need for less and less coated paper, used for magazines and catalogs.”

Bryerman said the NewPage acquisition will allow Verso to specialize in higher-quality coated paper and that the acquired mills had been underutilized under their previous management. He said the NewPage facilities are the “crown jewel” and “there’s a lot of low-hanging fruit” for Verso to take advantage of.

Verso has about $2.79 billion of long-term debt, according to data compiled by Bloomberg. That includes $650 million of first-lien notes issued to finance the NewPage acquisition and is up from $1.3 billion at the end of 2014.

Net Loss

Analysts participating in the teleconference said Verso’s disclosures were insufficient to assess the efficiencies created by the purchase of NewPage.

The company’s first-quarter results are not comparable with previous years, which don’t include the NewPage results. Pro forma data offered in a presentation prepared for the May 19 earnings call show sales falling to $806 million from $821 million with adjusted earnings before interest, taxes, depreciation and amortization rising to $44 million from $35 million. The pro forma data excludes NewPage results for the first six days of January, before the acquisition closed. The paper maker reported a $122 million net loss for the latest period.

The company’s shares have plunged 43 percent since the May 19 earnings call to 71 cents.

“I would just ask that the company consider increasing some disclosure on the NewPage side,” said Jonathan Sacks, an analyst at Stonehill Capital Management LLC, during the call. “The company has a couple of billion dollars of bonds outstanding and a very small equity market cap, so most of the folks on the call are probably on the bond side of the house. And the difference between the NewPage results and the Verso result is therefore meaningful for most of your callers.”

Bryerman said that since then, analysts have been in touch with Verso and indicated what data would be needed to boost investor confidence. He said management was receptive to the suggestions.

“You’re going to see major progress will have been made in the second earnings call in terms of full disclosure,” he said.

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