Norske Skog Judge Erred on Debt Swap, Covenant Review Says

  • Ruling showed `fundamental misunderstanding' of covenants
  • Paper maker's debt-exchange plan has split bondholders

A New York judge showed a “fundamental misunderstanding” of Norske Skogindustrier ASA’s bond covenants when he said that a planned debt exchange would be prohibited by indentures, according to research firm Covenant Review.

U.S. District Judge Richard Sullivan’s interpretation of the covenants was too narrow, said Scott Josefsberg, an analyst at Covenant Review. The judge wrote in his ruling on Tuesday that Norske Skog’s debt swap would be “explicitly prohibited” by existing indentures, even as he refused a request from a group of secured bondholders to block it.

“A broader reading of the covenants shows there is no overall restriction,” Josefsberg said. The judge’s comments may encourage bondholders “to push forward based on a flawed interpretation.”

The Norwegian paper maker’s debt exchange has divided investors, with secured bondholders including BlueCrest Capital Management, Marathon Asset Management and Sampo Oyj lining up in opposition to the company’s largest shareholder, Blackstone Group LP’s GSO Capital Partners. The case may also set a precedent for how distressed borrowers use qualified securitization financing notes, a type of asset-backed debt.

A looser interpretation of the rules could “open the door for other distressed issuers that may be looking for some flexibility within their covenants,” Josefsberg and his colleague Jane Gray wrote in a report published on Thursday.

Swap Terms

GSO and Cyrus Capital Partners have agreed to exchange unsecured Norske Skog bonds due in 2016 and 2017 for ones with longer maturities. The plan, which still needs support from other bondholders, includes new qualified securitization financing notes. 

The judge said issuing these securities isn’t allowed under the documentation of the paper maker’s outstanding senior secured notes. Still, he denied the secured bondholders’ request to block the exchange because they couldn’t prove “irreparable harm,” according to the court ruling.

Norske Skog will review the ruling with its legal advisers and consider any effects on the exchange offer, it said in a statement on Wednesday.

Friday is the deadline for bondholders to tender unsecured notes for the exchange.

The cases are Citibank NA, London Branch v. Norske Skogindustrier ASA, 650503/2016, New York State Supreme Court, New York County (Manhattan) and 1:16-cv-00850, U.S. District Court, Southern District of New York (Manhattan).

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