Pulp and Paper NetLetter

Wednesday, September 14, 2011

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NewPage's Bankruptcy Touches Off A Tussle Among Bondholders
Dow Jones Newswires 9/7/2011 8:45:00 PM
NEW YORK (Dow Jones)--A tussle is expected between senior bondholders and second-lien debt holders in NewPage Corp. after the paper maker filed for chapter 11 bankruptcy reorganization Wednesday.


--Recent market slump may force first-lien holders to take equity

--Apollo, Avenue Capital have big stakes in second-lien debt

--Speculation that Apollo may seek to merge NewPage and Verso

Instead of a pre-packaged bankruptcy with a laid-out plan for exit, which some industry observers expected, the company is set to begin negotiations with all of its stakeholders and come up with a plan during the reorganization process.

Bondholders, who don't expect to get paid 100 cents on the dollar, will seek an equity stake in the restructured company that emerges from bankruptcy. While the filing itself is not a surprise--the company, taken private in a leveraged buyout led by Cerberus Capital Management, has been facing negative cash flow for more than a year--the current weaker domestic economy will play a part in setting the tenor of the negotiations.

No allegiances or alliances have been formed yet, sources said, but there are many players with considerable stake who are working on gaining control of the company.

Cerberus, which owns nearly 80% of the company after its $2.3 billion purchase in 2005, doesn't own any NewPage bonds, but it's unclear if the private equity firm still wants to be a part of this company. Cerberus declined to comment on this. Other interested parties also declined to speak publicly about the situation.

Oaktree Capital was said to be active in buying first-lien debt through the summer "potentially for the purpose of fighting for an equity stake in the emerging entity," said Rahul Gandhi, an analyst with CreditSights, the independent research firm.

NewPage has a total of $1.77 billion outstanding on its 11.375% senior notes due Dec. 31, 2014, and $1.031 billion on its 10% senior second-lien notes due May 1, 2012, according to Moody's Investors Service, which downgraded the company to Caa3 from Caa1 earlier this week on uncertain financing prospects.

Apollo Management L.P. and Avenue Capital Group, a distressed-debt investment firm in New York, said to have bought sizable holdings of the second-lien notes, sources said.

J.P. Morgan, meanwhile, is leading a group providing $600 million in so-called debtor-in-possession financing, which the company can use for the next 18 months while it sorts out its financing under bankruptcy court protection.

"NewPage's filing won't be a quick in and out given the power struggles that are likely to be played out," Gandhi said.

Typically, in a bankruptcy, first-lien holders get paid first, second-lien holders next and subordinate debt holders after that. First-lien bonds of NewPage had traded at par, or face value, until late May on the assumption that even if the company filed for bankruptcy first-lien holders would be paid in full and second-lien holders would have a shot at the company's equity. This led Apollo and Avenue Capital to buy in, sources said.

Apollo has another reason to pursue NewPage, the industry leader with 35% of the market for coated paper, which is used in magazines. Apollo also owns a competitor, Verso Paper Corp. (VRS), and a merger of the two top players may result in better cash flow given the poor outlook for the paper industry.

Previously, Apollo has adopted a similar approach when it acquired Pliant Corp. in December 2009 in bankruptcy through a company it already owned, Berry Plastics Corp.

Unfortunately for investors, the sovereign crisis in Europe and concerns about the U.S. economy have made markets jittery and led to a rapid drop in junk bonds prices. Newpage's 11.375% notes, for example, lost more than 15 cents on the dollar over the summer, falling especially fast after the company announced lower-than-estimated second-quarter results.

The bond was trading at 87.5 cents on the dollar Thursday, up from the low-80s, which Gandhi of CreditSights says is the right price for these first-lien notes.

As a result, first-lien holders will get equity in lieu of some of their principal, an unexpected development.

The 11.375% first-priority senior secured notes will receive a combination of new debt and equity, and the 10% second priority senior secured notes will receive mostly equity, said Brian Bogart of KDP Investment Advisors.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@dowjones.com

(END) Dow Jones Newswires

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