Is Bankruptcy Inevitable for NewPage?

Despite growing market share and rising prices for its products, NewPage is having to fend off a leading analyst’s assessment that it is destined for bankruptcy court.

“Bankruptcy/restructuring is inevitable for the company, as it will never generate enough cash to meet its obligations,” Kevin Mason of Equity Research Associates wrote recently. “Many of NewPage’s existing debt holders have no hope of ever being repaid” because of the big paper maker’s “impossible debt load.”

North America’s top producer of coated paper responded by issuing earnings projections that forecast about $250 million in EBITDA (operating cash flow) for the second half of the year, versus only $25 million in the first half. NewPage’s EBITDA excludes nearly $175 million in quarterly expenses, mostly interest payments, so even the company’s projection calls for no profitable quarters this year.

“We currently expect that our levels of sales volume and pricing for the fourth quarter of 2010 will be indicative of the quarterly sales volume and pricing levels in 2011 after consideration of seasonal factors,” NewPage said in the SEC filing. After all, its machines are full, if not overbooked, and prices are still rising for its main products, coated and supercalendered papers.

By contrast, Mason projects 2010 EBITDA of less than $70 million and then about $260 million in 2011. He doesn’t foresee EBITDA surpassing $400 million in any year through 2014, which would mean actual earnings remain well under water for years to come.

He questions whether holders of NewPage’s senior secured debt, with a face value of $1.7 billion, will ever get all of their money back. Owners of other NewPage debt have even bleaker prospects.

And what about the owners? NewPage’s equity “is the financial equivalent of a dead man walking,” Mason wrote.

Mason, managing director of ERA, is not just any stock analyst. ERA specializes in the North American forest products industry, and Mason's company-by-company projections early last year about the value of black liquor credits turned out to be quite accurate. ERA’s research reports are generally available only to customers (See equityresearchassociates.com.), but it has granted permission for Dead Tree Edition to quote from the NewPage report.

A few years ago, Mason noted, Wall Street was eagerly pushing the benefits of consolidation in pulp and paper markets. As a result, the Cerberus hedge fund had no trouble obtaining backing for a mountain of debt when it decided in 2007 to “double-down” on the coated paper business by having NewPage buy StoraEnso’s North American assets.

But the move occurred just after coated paper demand started experiencing “ongoing secular decline.”

“With NewPage being the largest producer, it took it upon itself to 'control' the market. However, the cost to NewPage of closures and market-related downtime has been substantial, and price control escaped NewPage anyway.”

NewPage also exacerbated the usual buyers’ wariness of price leaders by creating “a lot of negative customer sentiment over the years,” Mason said. “It will take years to heal this damaged reputation.” (Indeed, one paper buyer tells me he was congratulated by a colleague in the magazine industry for being “NewPage-free.”)

Noting that AbitibiBowater, which is in bankruptcy reorganization, is also the product of consolidation frenzy, Mason said, “The jury is still out on the benefits of consolidation for the industry, but there is no doubt it is a great win for the bankers and other advisors.”

There has been at least one other winner in the NewPage saga: Since 2005, NewPage has paid more than $3.7 million to a company owned by the son of recently departed chairman Mark Suwyn for “a training program and a process to improve communication skills, consensus building and problem solving abilities,” according to NewPage’s annual reports.

If Mason is on target, NewPage will get plenty of practice for those multimillion-dollar problem-solving skills.

For other recent articles about NewPage, please see:

• NewPage Does The Curley Shuffle  
• Downsizing Has Made NewPage A Low-Cost Producer 
• NewPage Reportedly Has Deal For Kruger's Idled Machines  
• Are NewPage and Verso Headed to the Altar?