On several days recently, the company’s bonds have been the most heavily traded debt instruments in the U.S.
The betting turned sour this week as the company’s bond prices hit their lowest level in more than two years “on concern that the junk-rated coated-paper maker owned by Cerberus Capital Management LP will be unable to make an upcoming coupon payment and will restructure its debt,” according to Bloomberg. NewPage’s second-lien notes were trading at only 29 cents on the dollar Wednesday, down from 40 cents only four weeks ago.
Perhaps the drop occurred because word spread that the company is backing down on its announced $30-per-ton July price increase for coated freesheet paper. Or perhaps investors saw bad omens in last week’s announcement of a new CFO at North America’s largest coated manufacturer.
It’s not that Jay A. Epstein isn’t qualified for the job. But there are two troubling entries on his resume, Enron and White Birch Paper. White Birch and its affiliated companies in the newsprint business entered bankruptcy protection 16 months ago and don’t show much sign of getting out.
To be fair, Epstein apparently didn’t have anything to do with the famed collapse of Enron. He worked in what contacts tell me was an innovative and legitimate business – trying to create a futures market based on pulp and paper prices – that failed because the parent company went down the drain before many people in the tradition-bound paper-making and paper-buying industries had grasped the benefits of hedging.
And the White Birch/Brant empire seemed to be an accident waiting to happen. It is saddled with high-cost mills, rapidly declining demand, and an owner who’s been distracted by a messy and very public divorce from ex-supermodel Stephanie Seymour. (See White Birch: Weaker Than I Realized.)
If not for its crushing debt load, NewPage might actually look like a viable business – certainly more viable than Enron in its last days or White Birch today. The North American coated paper industry has been unusually disciplined lately in managing capacity, which has helped drive up prices in the face of tepid demand.
The weak dollar makes NewPage’s main market, the U.S., relatively unattractive for offshore suppliers. The company’s massive downsizing has apparently left it with relatively low manufacturing costs. And efforts to restart competing supercalendered paper mills in Ontario and Maine keep sputtering out.
Here’s some advice for speculators who are trying to handicap NewPage and project its cash flows: Follow the pulp. Market prices for kraft pulp are at record highs. Rarely has it been more profitable for U.S. mills to sell their pulp rather than turning it in to freesheet paper. And rarely has it been less profitable for them to make paper with purchased pulp.
So the questions to ask are:
- Is NewPage “pulp long” or “pulp short”? The company’s 2010 annual report says it supplied 94% of its pulp requirements but also sold some excess hardwood pulp last year. But recent mill shutdowns may have shifted the pulp-paper balance significantly.
- How well suited are NewPage’s pulp operations to the sale of market pulp, especially for export? Just because you can make pulp on site for your own paper machines doesn’t mean you have a way to prepare and transport it to customers half way around the world. NewPage’s concentration of mills in the U.S. Midwest may be a disadvantage here.
- What about Verso? NewPage would benefit if its largest competitor can divert a fair amount of its pulp to export markets. That would make Verso inclined to idle paper machines and sell the excess pulp rather than driving paper prices down by making excess rolls.
For more information on NewPage’s travails, see: