NewPage Bankruptcy Filing

This morning, paper producer NewPage, filed for Chapter 11 protection in Delaware. For those interested, you can view the bankruptcy claims agent site here:

Here are the relevant docket filings:
In an exhibit in the second link, Lazard has a great breakdown of the capital structure which I've pulled out for readers:

At the end of the day, JP Morgan's distressed trader went out with a 86.25 / 87.25 market on the 11.375% First Lien Senior Secured Notes and a 12.5 / 14 market on the 10% Second Lien Notes.

JP Morgan, which has underwritten the DIP and is leading the syndication sent out a new issue announcement detailing the terms of the DIP:
  • $350M First-Out DIP ABL Revolver, $250M Second-Out Term Loan
  • Pricing on Term Loan: L+750, 1.50% Floor, with OID TBD (I'm hearing 99)
  • Use of Proceeds: Refinance pre-petition revolver, fees, and GCP
In my opinion, the most important take away from CEO George Martin's declaration was the LACK of discussion of negotiations between various parties. Generally you will see an affidavit / declaration, in the "Events Leading to Chapter 11" section a summary of the negotiations between stakeholders leading up to an event. In this case all we get is this:
"Lazard’s efforts were met with a general market unwillingness to provide the Debtors with additional financing or to increase the Debtors’ borrowing base. The lack of market interest in an out-of-court restructuring, coupled with the Debtors’ increasing needs to service, and in the near term refinance the majority of, their long term debt obligations, convinced the Debtors that an out-of-court restructuring was becoming increasingly unlikely."
The "draft" DIP Credit Agreement was also filed on the docket. You can find it here:

In it, a minimum consolidated EBITDA covenant is established at $275M with a max quarterly capex covenant (starting in Q1 2012) of $25M. In addition, the DIP projections show a very aggressive cash build for NewPage as the cash leakage from onerous interest payments are shut off.

Even as a second out piece of paper, the DIP looks to be a safe investment for the conservative investor with a ~10% IRR.

Press reports have indicated that Apollo and Avenue Capital hold more than $400M of NewPage's 10% 2nd lien bond as of June of this year.

Simply put: This one could get ugly and a valuation fight will surely arise similar to what we saw in Smurfit Stone. It will ultimately be up to the judge to decide which valuation argument to go with (i.e. second liens will fight for a large valuation to be in the money, whereas first liens will fight for a lower valuation to keep all the goodies for themselves). And as always, management will play a decisive role here in that they will be looking out for themselves to see which creditor provides the best "management compensation plan" in its suggested plan. Always follow the incentives.

Add in an underfunded pensions and two classes of debt beneath the "warring" classes and I think you'll see some fireworks. Stay tuned.


Anonymous,  9/08/2011  

Back on 4/20 you wrote up a strong endorsement of the 2nd liens which were marked at 57 on the bid. You wrote, "So all in all, with very little downside and tremendous upside NewPage's 2nd lien looks like a very interesting investment opportunity." I don't care that the bonds are now 12.5/14, but am more interested to know what inputs you would have used to adjust the valuation (unless you still have the same valuation) as the price of the bonds deteriorated this spring and summer. As a non-distressed analyst I have difficulty learning about private companies that were LBO'd because I don't have a network in those areas.

Keep up the great work on the blog. It's not easy to get an insight into this fascinating market.

Anonymous,  9/08/2011  

Why would the senior lenders care about a lowered valuation if they are being paid out 100 cents on the $ in a higher valuation for the 2nd lienholders? As long as they're getting their $1.9B plus any accrued interest, seems to me the remaining cash will just be distributed pari passu to the junior lienholders. At the same time, they're going to have to gift something to the junior lienholder/unsecureds to get the plan confirmed by the judge or risk a cram down, so a higher valuation would provide more cushion and ultimate recovery to the senior bondholders to my understanding.

Anonymous,  9/08/2011  

The valuation will determine who will own the equity of the newco. Apparently we've got Oaktree on one side (senior) and Apollo/Avenue on the other (2nd lien).

Anonymous,  9/08/2011  

I"m not sure if the DIP loan is so conservative. The 2nd out DIP term loan is sharing ABL collateral with the DIP revolver. If the revolver is fully drawn ($350mm), there might not be enough ABL collateral left to cover the TL. The DIP facility has a junior lien behind the 1st lien noteholders on fixed assets.

simon,  9/09/2011  

In my opinion, the dip is bullet-proof from a valuation standpoint. The fact that you're getting paid a pretty handsome yield makes the investment more compelling.

Anonymous,  9/09/2011  

I agree the DIP TL is safe in most scenarios, but I wouldn't say it's bullet proof. In my mind, bullet proof would mean full recovery in a liquidation scenario. If in the low likelihood newpage goes chp 7, then this DIP TL could be a doughnut. I do think that someone would buy newpage before it liquidates but I'm just trying to highlight the true downside scenario here.

Anonymous,  9/09/2011  

DIP seems fine if the company exits, but is in a rough spot if things fall apart and there's a breakup.

Reading between the lines on the DIP structure and the materials Lazard posted, seems like a noteholder is probably agitating for a breakup. The question is, 1st lien or 2nd.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.