Blackstone Group LP’s plan to protect its investment in a distressed Norwegian paper maker faces a critical challenge this week.

Holders of 326 million euros ($356 million) of Norske Skogindustrier ASA’s bonds have to decide by Feb. 3 whether to exchange their notes for longer-term securities. The company, which needs to renegotiate debt as readers switch to electronic platforms and revenue falls, said it would impose severe losses on creditors who don’t participate.

Blackstone’s GSO Capital Partners unit proposed the exchange and needs other bondholders to agree for the deal to succeed. The plan would extend bonds long enough to avoid triggering payouts on credit-default swap contracts GSO sold insuring the company’s debt, people familiar with the matter said in December, asking not to be identified because the information is private.

“The upside is very limited in accepting the offer, as bondholders would get longer-term notes with lower cash coupons in a business with weak prospects of a turnaround,” according to Rahul Gandhi, an analyst at independent research firm CreditSights. “If only a small percentage of 2016 bondholders hold out, the company may find a way to pay them.”

Total Loss

“An unsuccessful exchange raises the prospect of a comprehensive balance sheet restructuring, leaving secured bondholders in charge and a likely close to total loss in value for 2016 and 2017 noteholders,” said Norske Skog spokesman Carsten Dybevig.

GSO and Cyrus Capital Partners, which raised equity stakes in the company to shore up support for the exchange, hold about 38 percent of the 2016 securities and 68 percent of those due 2017. At least 90 percent of the 2016 notes and 75 percent of the 2017 bonds need to be tendered for the exchange to succeed. An official at GSO in London declined to comment on the exchange offer.

Under the terms, investors would swap 2016 and 2017 bonds for qualified securitization financing notes due in 2026, new unsecured securities due in June 2019 and Dec. 2026, perpetual notes and the possibility to invest as much as 15 million euros in the paper maker’s equity at 2.24 kroner a share. 

“By now it’s clear that some sort of debt restructuring needs to occur,” said Jeffrey Cope, an analyst at independent brokerage firm Stifel Nicolaus in London. “The company won’t be able to repay the bonds due in June with its current liquidity.”

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