NewPage's Fraudulent Deals Started in 2007, Creditors Claim

Four years before it went into bankruptcy protection, NewPage Corp. was essentially structured as a giant scheme to defraud suppliers and other creditors for the benefit of its owners, a creditors committee charges.

The creditors committee wants the bankruptcy court to declare as “fraudulent transfers” the highly leveraged 2007 transactions that enabled NewPage to become North America’s largest producer of magazine-quality papers and the 2009 refinancing of that massive debt.

The Official Committee of Unsecured Creditors is also trying to claw back millions of dollars in “excessively high” management fees paid to leveraged buyout firm Cerberus, NewPage’s primary owner, and millions more in bills paid to two suppliers that are subsidiaries of Stora Enso, a European paper company that owns 20% of NewPage.

The U.S. Bankruptcy Court appointed the committee to advocate for the interests of companies that were left holding accounts receivable but no collateral when NewPage filed for Chapter 11 bankruptcy protection on Sept. 7, 2011. The committee consists of representatives of organizations that stand to lose millions of dollars resulting from NewPage’s insolvency, including the Pension Benefit Guaranty Corporation, Deutsche Bank, OMNOVA Solutions (a major supplier of specialty chemicals to the paper industry), and United Steelworkers.

NewPage’s owners have challenged whether the committee has the right to press its claims in bankruptcy court. The court has not ruled on that question yet.

Among the creditors’ claims are:

Destined to fail
NewPage’s 2007 acquisition of Stora’s North American paper mills left it “with a crippling amount of new debt, but without any new value to show for it. No new equity was injected whatsoever. The target Debtors [the various NewPage subsidiaries] simply had new owners. Hobbled by this
massive, incremental debt, the enlarged and highly leveraged NewPage never had any realistic hope of sustaining its operations or paying its debts as they came due.”

Offloaded
"None of the parties to the [2007] deal cared [about NewPage's shaky finances] – the risk of the transaction was entirely offloaded to unsecured creditors. Because no party at the table was injecting any new equity, and no lender was extending loans that were not secured by the company’s most valuable assets, no party at the table had anything significant to lose (unlike unsecured creditors, who became involuntary investors in the new enterprise). The lenders were to be granted first and second lien security interests. The advisors were to take more than a hundred million in fees and transaction costs. Stora was going to be paid more than $1.5 billion in cash. And Cerberus was extending its 'runway' to recover its equity investment, an extension funded by unsecured creditors’ money as opposed to its own.

Manipulated numbers
"In order to justify the incurrence of an excessive amount of incremental debt, and to avoid tripping pre-existing debt covenants designed to guard against such scenarios, the parties to the [2007] transaction manipulated forecasted EBITDA [operating cash flow] to reach a pre-ordained level. The forecasts, accordingly, were anything but reasonable.”

Debt laundering
“The Committee also seeks to avoid obligations incurred in 2009 to ‘refinance’ or effectively ‘launder’ the avoidable debt from 2007. The Debtors [NewPage subsidiaries] did not receive fair value in 2007, and they could not cure this defect by attempting to ‘white wash’ it in 2009 when the 2007 debt inevitably defaulted.”

“The Debtors thereafter kept the ball in the air for another two years, aided by a more than $320 million windfall in the form of unanticipated tax credits, but ultimately had no choice but to file for bankruptcy in 2011.” [The tax-credit windfall was from Alternative Fuel Mixture Tax Credits, better known as black liquor tax credits. See"Black Liquor" Credits Are Helping Paper Buyers for an explanation.]

Preferential transfers
“… on the eve of bankruptcy, NewPage paid to Cerberus more than $2 million, representing approximately one year’s worth of fees and expenses accrued under an advisory agreement. In addition, during the year prior to the bankruptcy filing, NewPage paid approximately another $1 million to Cerberus for purported management fees without receiving reasonably equivalent value in return.” The creditors committee claims the payments by an "insolvent" NewPage are improper “preferential transfers” that should be disallowed.

Expensive advice
“ . . . during the twelve months leading up to the [Chapter 11] Petition Date, COAC [Cerberus] charged NewPage for the services of one of its consultants in an amount that exceeds the annual base salary of NewPage’s President & Chief Executive Officer.”

Questionable advice
“ . . . in the months leading up the chapter 11 filing, NewPage was seeking to divest itself of NPPH [its Port Hawkesbury paper mill in Nova Scotia], purportedly negotiating a settlement of issues between NewPage and NPPH prior to launching their respective chapter 11 and CCAA [Canadian bankruptcy protection] cases. One consultant, in particular, was deeply involved on both sides of the transaction, notwithstanding that the interests of NewPage, NPPH and Cerberus (as controlling shareholder of NewPage) were very much in conflict. Indeed, any ‘advice’ that NewPage received from Cerberus employees likely served only Cerberus’ interests and did not benefit NewPage or its stakeholders.”

Relevant documents in the bankruptcy case include:

• Creditors' committee motion challenging the 2007 and 2009 financing deals.
• Committee's motion challenging NewPage payments to Cerberus and Stora.
• Agenda for court hearing Thursday (July 12) on various matters related to the committees' motions.
• Home page for NewPage's Chapter 11 case.

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