Friday, June 17, 2011

An Ominous Week for NewPage

If you like gambling, forget blackjack, horses, or the lottery. The debt of NewPage Corp. is the hot item these days at that grand casino known as Wall Street, as speculators wager on whether the big paper manufacturer will be able to make its bond payments and stay out of bankruptcy court.

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.
And speaking of Verso, here’s one more question many of us have been asking for months: Why exactly has Apollo Management, Verso’s primary owner, bought up so much of NewPage’s second-lien notes, potentially giving it significant leverage over NewPage?

For more information on NewPage’s travails, see:


Anonymous said...

Which train wrecks first, White Birch or Newpage? White Birch has been under bankruptcy protection for eighteen months, but still has done zero to come up with a plan tou be profitable and emerge from it. All they have done is stall and then do some sham auction where their largest secured creditor did some stalking horse bid manuever and ended up with four lemons(mills). Now they cannot get a labor agreement. Newpage may be facing some sort of restructure process if not bankruptcy, but White Birch is looking at liquidation at this point, and scarp metel/land value for the "assests".

Anonymous said...

Great insight on the New Page debacle. The only true pulp long mill in their complement is Wickliffe, which unfortunately flash dries their fiber making it less than desirable. They can make pulp at many of their other locations, though Luke, Biron, and Hawkesbury do not have an easy option. Stevens Point is non-integrated. In summary, pulp sales will not save New Page. Verso's Quinnesec mill is top notch, fiber long, and the star of their foursome. No doubt Verso has their eye on some of the key sites at New Page (Rapids/Escanaba) that would round out their company very well.

m22 said...

Great article, imagine a default on the 6/30 bond payments and ensuing restructure. NewPage's crushing debt load doesn't allow much flexibility with weaker market conditions - to add to your comment that NewPage has backed down from it's July price hike, American Forest & Paper Association's May 2011 report said coated free sheet and coated groundwood fell 10% & 15%, respectively.

Verso also has a mountain of debt, though most of it high yield without covenants. You mentioned that pulp is key for NewPage. From the 10-K, Verso is a net producer of pulp. Could Apollo use it's 2nd lien position to force NewPage to shut down mills to limit supply or sell some mills cheaply to Verso?

Would you buy Verso's equity (10% of enterprise value) as a play that the coated paper business will improve or benefits from a NewPage restructure? Perhaps, the benefits would be overshadowed by a continued weak coated paper demand?

Looking forward to your comments!

Anonymous said...

There is nothing positive about a New Page restructure - another blow to an already weakened segment of the industry. Verso had managed their debt well but it's still unclear whether they will do anything with New Page post-restructure. More mill closings will occur, which is the real tragedy in this story - each of the NP mills could be profitable short term if better managed.
The long term view of the coated pub market is hairy - demand will continue to drop and only the most nimble will survive. Sappi has positioned themselves well, though their European leg could be a negative. Verso will need to round out their grade lines long term and New Page - well, time will tell. Several of the mills will be around for a long time, regardless of the name on the building. Appleton and West Linn continue to hang on wtih low overhead, but the burden of skyrocketing raw material pricing could be a knockout blow if pricing doesn't keep up.