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AbitibiBowater filed a placeholder Plan of Reorganization in bankruptcy court this week, proposing to equitize USD 5.4bn of bonds and to repay USD 1.3bn of secured claims. Given the troubles still gripping the paper industry, any emergence funding will be short on debt and long on cash from asset sales and a rights offering backed by bondholders like Paulson & Co., three sources familiar with the matter told Debtwire.
Abitibi’s struggles to emerge from Chapter 11 present something of an anomaly as leveraged borrowers benefit from a strong technical bid for anything faintly correlated to economic recovery. Two other US manufacturers – Lyondell Chemical and Smurfit Stone – sold USD 1.5bn of exit loans last month with the same covenant-lite structures investors purportedly swore off for good just a few years ago.
But for dying industries like North American paper, the stigma of secular decline seems to outweigh even the most irrational buyside exuberance. Abitibi couldn’t find enough takers for new debt and is deciding to raise the bulk of the USD 1.8bn it needs through a bondholder-backed rights offering and the sale of non-core hydro-electric assets and forest land instead, according to the sources.
“You can’t make anyone comfortable that a newsprint company’s earnings will hold up,” said an analyst. Investors are largely unwilling to extend new credit to the newsprint sector if leverage exceeds the 2x-3x threshold, several buysiders noted.
A group of Abitibi’s bondholder’s – including Paulson, Avenue Capital, Steelhead Partners and Fairfax Financial – accepted that fact and agreed to backstop a rights offering in order to pay off part of the secured claims, the first three sources said. The debtor will likely refinance the rump piece of secured debt and market a new ABL revolver totaling at least USD 500m to fund post-restructuring operations, said two of the sources familiar and an industry source.
Pay to play
A partial paydown to secured creditors would shrink the amount of debt that needs refinancing and create the fulcrum of the workout at the bonds. Although the company boasted USD 750m of cash at YE09, management remains hesitant to dip into that pot for debt retirement.
Volatile liquidity swings chronically plague AbitibiBowater and the company is bracing for another working capital drain in 1H10 as it builds inventory, said one of the sources familiar and a buysider. Enter the asset sales.
The company’s financial advisor, Blackstone, is shopping the non-core hydro and forestry assets in hopes of fetching around USD 600m in proceeds. Assuming the company can execute those transactions, USD 700m of pre-petition secured debt would remain, saddling the company with a bloated USD 1.2bn capital structure at emergence when factoring in the new ABL.
A potential note holder-backed rights offering would cut the remaining secured claims pool down to a level where leverage is palatable. But even then, marketing a 2x-3x leverage sweet spot based on USD 250m-USD 350m in expected 2010 EBITDA will require artful salesmanship, the buysider and both sellsiders said.
AbitibiBowater generated zero EBITDA in 4Q09, and roughly USD 100m on a TTM basis. For the past three years, quarterly EBITDA fluctuated wildly with newsprint prices, ranging between negative USD 40m and a positive USD 150m. Recent strength in newsprint points to a USD 250m-USD 350m run rate, but past experience belies the sustainability of that performance.
Even Abitibi’s stronger competitors face an uphill climb in currently frothy debt markets. White Birch Paper agreed to an extortionate Libor+ 1,000bps coupon on the debtor-in-possession (DIP) loan it obtained from Black Diamond and Credit Suisse eight weeks ago. That’s a far cry from the Libor+ 400bp and Libor + 475bps Lyondell and Smurfit paid on their covenant-lite loans
And while Lyondell exited bankruptcy on 30 April and Smurfit should file suite this month, Abitibi could make an extended stay in Chapter 11 protection, the first three sources said. The paper maker’s incomplete POR misses a number of key elements, including the specifics of unsecured recoveries and a disclosure statement.
By entering a placeholder plan in the docket, Abitibi gives the semblance of progress as it petitions Delaware Bankruptcy Judge Kevin Carey to extend its exclusive right to file a POR, said two buysiders. Officials at Paulson, Avenue Capital, and Fairfax declined to comment. Messages left with AbitibiBowater, Steelhead and Blackstone officials were not returned.
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