Wiping Out Debt, Or Wiping Out . . .

"Restructuring" didn't keep Verso's
Bucksport, Maine mill from closing.

North American paper companies that used to rely heavily on the magazine industry have found two ways to survive: 1) make new products, or 2) undergo “financial restructuring” (our Publishing Word of the Day).

Verso Corporation, the country’s largest maker of magazine-quality paper, announced last week that it had financially restructured away $2.4 billion in debt, reorganized, and emerged from bankruptcy protection as a publicly traded company once again.

Plus, it got an additional “$595 million in exit financing to support ongoing operations,” including “an asset-backed lending facility.”

Market value after the first official day of trading: $406 million.

Like just about every other maker of coated paper on the continent, Verso’s "ongoing operations" now include using its machines to produce more “specialty” papers -- stuff like food wrappers that aren't affected by declines in the publishing business.

(Mr. Tree called his mortgage company to report that the remaining debt on his house is likewise six or so times his net worth and that he therefore qualifies for a financial restructuring to cancel the debt. Oh, and some asset-backed exit financing to support his ongoing operations would really help him write more “specialty” articles. The mortgage company offered to send over some sheriff’s deputies to provide exit assistance by hauling Mr. Tree’s assets to the curb.)

Shacking up
Verso's re-emergence officially ends its unusual relationship with competitor NewPage. The two U.S. companies sort of shacked up instead of getting married, sharing resources but remaining somewhat separate, in a financial restructuring so convoluted that even the bondholders didn't quite seem to understand it. The courtship, drawn out for a year by a federal antitrust review, lasted longer than the non-marriage itself did.

Poor Verso. It didn’t get the memo a few years ago that the rule of the publication-papers industry had become “He who gets to bankruptcy first wins.” Financial restructuring via the bankruptcy courts has already been the salvation of several competitors, though it didn’t do much for the stockholders or creditors.

I believe I’m correct in saying that every significant North American-based manufacturer of publications papers except one has been through a bankruptcy reorganization.

The exception is Kruger, which has heavily diversified into such products as toilet paper and wines. So while its competitors were financially restructuring to avoid getting wiped out, Kruger survived by helping its customers get wiped out.


Other recent entrants in our 31-part Publishing Word of the Day series include PMS envy and sugardaddying.

Coated Paper Shakeup Leaves Most U.S. Capacity in Foreign Hands

Coated paper was invented in the United States, but after a major industry shakeup today most of the country's ability to make coated paper is owned by foreign companies.

This morning, two momentous events occurred nearly simultaneously in the industry that makes coated paper for catalogs, magazines, inserts, and brochures:

1) NewPage, the largest North American maker of coated paper, sold its Biron, Wisconsin and Rumford, Maine mills to Catalyst Paper, which shifted about 12% of the nation's coated-paper capacity into Canadian hands.

2) The purchase of NewPage by Verso, the continent's #2 maker of coated paper, was completed a year and a day after it was first proposed. The U.S Justice Department, fearing a combined Verso-NewPage would have too large a market share, required the sale of the two NewPage mills for the takeover to be approved.

This past summer, four U.S.-owned companies -- NewPage, Verso, Appleton, and FutureMark -- operated U.S. mills able to make about 4.8 million tons per year of the glossy paper. That was 65% of the country's coated capacity. The rest was in the hands of companies based in South Africa (SAPPI), Canada (Resolute and West Linn), Finland (UPM), and New Zealand (Evergreen).

Since then, FutureMark went out of business, Verso closed its Bucksport, Maine mill, and NewPage sold the two mills to Catalyst. That leaves two U.S. companies -- Verso and Appleton -- with coated capacity of 3.4 million tons, just under half of the country's total. The new Verso, though, is by far the largest manufacturer of coated paper in the U.S., with more than double the U.S. capacity of #2 SAPPI.

On Jan. 3, 2014, the stock price of Verso, which was seemingly on the verge of bankruptcy, was only 65 cents per share. It closed today at $3.37, an increase of 418% in barely a year.

Wisconsin-based Consolidated Paper invented coated paper in 1935, revolutionizing both the paper and magazine industries. But in recent decades, the innovations have come mostly from Western Europe and the investments have been concentrated in Asia. Even the tiny Canadian industry has out-innovated the U.S. companies, with the forerunner of Catalyst pioneering an efficient process of coating and calendering paper and Kruger building the newest machine.

Related articles:

• NewPage and Verso Find a Catalyst For Their Merger  
• The Monopoly That Haunts the U.S. Paper Market: USPS
•  Untangling the Verso-NewPage Deal

Downsizing Has Made NewPage A Low-Cost Producer

In less than three years, NewPage has gone from talking about its high-cost coated paper machines to bragging about its low-cost position.

“As of March 31, 2010, 90% of our non-specialty coated paper machines were in the top 20% of efficiency of all non-specialty coated paper machines in North America, Europe and Asia based on the cash cost of delivered product to Chicago, as reported by RISI,” the company said in a filing with the U.S. Securities and Exchange Commission late last week.

“We believe our scale and efficiencies are unmatched within the industry,” North America’s largest producer of coated paper said in the document.

Its cost-per-ton advantage in the past couple of years has ranged from 8% ($49 per ton) when low pulp prices helped non-integrated producers, to 14% ($84 per ton) when pulp prices were high, NewPage’s filing said. The company did not specify the grade of paper it was describing, but the reference to non-integrated producers (those who must buy their pulp) suggests it is coated freesheet (CFS).

As they prepared in late 2007 to buy Stora Enso’s North American operations, NewPage executives put out the word that they would soon own a disproportionate share of the continent’s smallest (and therefore highest-cost) paper machines. Rather than letting market weakness drive down prices, they said, they would idle their high-cost machines to keep the market in balance.

Sure enough, NewPage shut down six paper machines during 2008, and coated prices rose gradually for most of the year. But when excess capacity started causing prices to crash just over a year ago, NewPage stated publicly that it had no more high-cost machines to shut down. (See NewPage Turning Over a New Page: No More Shutdowns.)

With competitors slow to respond with their own market-stabilizing shutdowns, NewPage took a more active tack this year: It bought out Domtar’s coated-groundwood (CGW) business, which ensured that the company’s only coated mill would remain idle, then reportedly did a similar deal with Kruger last month to help its Trois-Rivieres, Quebec mill exit CGW. (See NewPage Reportedly Has Deal For Kruger's Idled Machines, which, by the way, has not been confirmed or reported by other media -- or denied by the two companies.)

Other interesting factoids and statements in the NewPage filing include:

• "We have substantial indebtedness. As of March 31, 2010, we had $3,150 million of total indebtedness and we have up to $410 million available for borrowing under our Revolver."
• "For the year ended December 31, 2009 and the quarter ended March 31, 2010, earnings were insufficient to meet fixed charges by $363 million and $175 million, respectively."
• Annual production capacity on its 20 machines is about 3.2 million tons of coated paper, 1.0 million tons of supercalendered paper, and 200,000 tons of specialty paper. In 2009, 58% of the coated paper was CFS and 42% CGW.
• “Our largest customer, xpedx, a division of International Paper Company, accounted for 19% of 2009 net sales. Our ten largest customers (including xpedx) accounted for approximately 50% of 2009 net sales.” Other “key customers” are Condé Nast, McGraw-Hill, Meredith, News America, Pearson Education, Rodale, Time, Quad/Graphics, R.R. Donnelley, Worldcolor, Sears, Williams-Sonoma, and paper merchants Lindenmeyr and Unisource.
• “For the year ended December 31, 2009, we produced approximately 94% of our pulp requirements, which excludes our sales of market pulp, with the remainder supplied through open market purchases and supply agreements.” NewPage sells some hardwood pulp to other companies.

For more insight into NewPage, please see:

• Are NewPage and Verso Headed to the Altar?: A "vulture trio" of hedge funds that own rival Verso is trying to take control of NewPage by buying up its debt, a published report said in March. NewPage's filing says that Cerberus Capital Management is still in the driver's seat.
• "Black Liquor" Credits Are Helping Paper Buyers: Though NewPage raked in more than $300 million last year from black liquor tax credits, it says the loophole distorted the market and drove paper prices down.
• Is Domtar's Exit a Game Changer for Coated Paper?: More on the NewPage-Domtar deal.

NewPage Reportedly Has Deal For Kruger's Idled Machines

NewPage and Kruger have reached a deal ensuring that Kruger doesn't restart the soon-to-be-idled coated-paper operation at its Trois-Rivieres, Quebec mill, several sources say.

The arrangement would reportedly be similar to the deal NewPage did in March, when it agreed to buy Domtar's coated-groundwood product lines and trademarks after Domtar closed its only coated mill, in Columbus, MS. (See Is Domtar's Exit a Game Changer for Coated Paper?)

In this case, Kruger will continue making lightweight coated groundwood on its world-class machine at the nearby Wayagamack mill. But the sources say its business above 40# is being turned over to NewPage.

One irony of the deals is that NewPage has said it wants to focus its coated-groundwood business more on lightweight papers; both Columbus and Trois-Rivieres focused on medium and heavy weights. But as North America's #1 producer of coated paper, what NewPage gets from the Domtar and Kruger deals is capacity reduction -- that is, less competition -- in the oversupplied coated-paper market.

Kruger announced yesterday that it will lay off 320 employees at Trois-Rivieres in June when it shuts down two paper machines and a coater. It said it would stop making both coated and supercalendered paper at the mill, but it's not clear whether the deal with NewPage includes supercal.

Market observers have said that the age and small size of the Trois-Rivieres machines probably made it a high-cost producer of coated groundwood and supercal. The recent strength of the Canadian dollar versus the U.S. dollar also hurt because most of the mill's output is sold in the U.S. With pulp prices soaring while paper prices are gradually coming out of a trough, it's probably more profitable for Kruger to sell its pulp to others rather than to make paper with it.

Where Are Coated Prices Headed? Let's Vote On It!

Just when the wheels had fallen off the attempt to raise North American coated-groundwood prices, the wagon started rolling again today.

NewPage announced a $30-per-ton increase on coated-groundwood (CGW) and coated-freesheet (CFS) prices to take effect on Monday. The pricing for most contract customers cannot be changed until April 1, and many have locked in prices through June 30.

Today's announcement came only a couple of days after AbitibiBowater started spreading the word that it was “postponing” its Feb. 25 attempt to raise CGW prices by $60 per ton on April 1. Kruger, which seemed to be the only other mill that jumped on that bandwagon, has also reportedly backed down in recent days.

The North American coated-paper market still suffers from overcapacity that has kept prices low. But thanks to an earthquake, floods, a strike, and a government ruling, an argument can be made for jacking up CFS prices.

Last month’s Chilean earthquake, wet weather in the U.S. South, and other factors have caused prices for kraft pulp -– the main ingredient in CFS -– to skyrocket. Don’t be surprised to see shutdowns soon at CFS mills that rely on purchased pulp. And even integrated mills may be tempted to idle their paper machines so that they can sell their now-valuable pulp to a hungry market.

An anti-dumping decision in the U.S. and a similar case in Europe have also cooled Asian producers on selling low-priced coated sheets in the U.S.

The case is weaker for CGW, a market in which prices had drifted lower early this after seeming to stabilize in the fall. Most CGW products use relatively little, if any, kraft pulp, and Asian producers have not been a factor in North America.

A few years ago, a strike in Finland would have sent U.S. CGW buyers into a panic. But the weak dollar had already chased the Finns away, limiting the impact in North America of a port strike that is strangling the Finnish paper industry.

My guess is that CGW prices will start moving up only after CFS does and only after more CGW capacity is idled.

What’s your bet? On the right you’ll see a chance to vote on where you think the RISI index for 40# coated #5 (at $735 in February) will be on July 1. Warning: I tried a similar crowdsourcing exercise on CGW prices a year ago, and hardly anyone correctly predicted the market crash that came shortly afterward.

Related Articles:

• Coated Paper Prices: Can They Get Uglier? Results of last year's poll on CGW prices.
• A Price Increase on Coated Paper? What is Abitibi Smoking? AbitibiBowater's announcement of CGW price increases last month was based on desperation, not market reality.

Coated Paper Prices: Can They Get Uglier?

The rapid decrease in prices for coated paper the past few months caught nearly everyone by surprise. Now the question is whether the drop is over.

Just four months ago, Dead Tree Edition conducted a poll asking readers to predict where the RISI index for 40# coated #5 would be in July. Only 29% said it would be less than $820 per ton ($41/cwt.) RISI itself was predicting that the index, then at $900, would bottom out at $845 in the 3rd Quarter.

RISI revealed its July numbers yesterday, showing that it and most of our readers were way off the mark The index was at $770.

The market had become accustomed to coated mills, especially market leader NewPage, closing machines or even entire mills to bolster pricing amid falling demand. But by spring, most of the obvious North American candidates for mothballing were gone. That left large, efficient machines able to produce more coated paper than North America needs.

The mills battled back with down time, making uncoated products on coated machines, and winning business from offshore mills. But it still wasn't enough, as many customers caught short by the rapid decrease in their own consumption simply stopped buying for awhile and used their inventories instead.

Some people argue that prices will start rising because the mills are hurting so bad. By that logic, magazines will see their ad pages start bouncing back and the Postal Service can stop worrying about the loss of First Class Mail. Wishes don't always come true. In fact, mills that are struggling to stay afloat are more tempted to drop their prices rather than idle their machines -- unless the prices no longer cover their cash costs.

With the Canadian dollar, energy costs, and pricing for market pulp all rising, paper prices may be nearing cash costs for some mills. In fact, Kruger recently announced the permanent shutdown of the small coated machines at Trois-Rivieres, Quebec. But most North American coated paper is made at U.S. mills by companies like NewPage, Verso, SAPPI, and AbitibiBowater that have their own kraft mills that for now are heavily subsidized by the federal government.

StoraEnso, which owns one-fifth of NewPage, isn't counting on a rebound any time soon. It recently wrote down that investment, citing "poor prospects of an upturn in the [North American] market."

Perhaps the paper market is like the U.S. economy, where GDP sank by "only" 1.5% in the 2nd Quarter versus 6.4% in the 1st Quarter: The paper market may not be improving, but it's probably getting "less bad" than it was in the spring.

NewPage Turning Over a New Page: No More Shutdowns

NewPage sent a message to its competitors in the North American coated paper business this week: Your turn.

NewPage has closed five paper machines in the past year and temporarily idled others, shouldering much of the burden for adjusting supply to a weak market. Those efforts to prevent prices from crashing resulted in the company selling 43% fewer tons of coated paper in the first quarter than it sold a year earlier, NewPage reported Wednesday.

But with a quarterly loss of $114 million and a gross profit margin of only 0.3%, the company has grown weary of giving up market share while competitors keep their machines running -- and markets loose.

"We don't have any high-cost operations remaining that could be candidates for closure," president and CEO Rick Willett said during the company's quarterly earnings conference call. "The more prudent thing for us to do is manage our downtime as cost effectively as we can and really get ready for the recovery in volume."

Downtime is a way to deal with temporarily weak demand but doesn’t address the North American coated-paper industry’s more chronic problem -- more than a million annual tons of excess capacity. NewPage is leaving the task of further shutdowns to Verso, Kruger, et al.

NewPage’s quarterly earnings announcement also had several significant omissions:

• “Black liquor” revenue: NewPage was a relative latecomer to the black liquor party, not qualifying for the federal-government credits until last month. The $45 million it recently received for using black liquor/diesel mixtures during the first quarter were not booked in the quarter.

• Unisource deal: The company announced this week that it will supply more than 100,000 tons per year of coated sheets for Unisource’s private-label program, which was formerly supplied by a Chinese manufacturer.

• The “S” and “D” words: The earnings announcement noted that imports of coated paper, especially from Asia, are increasing. But there was none of the usual bluster about efforts to prevent subsidized Asian mills from unfairly dumping their product in the United States. (OK, class, today’s language lesson: When a foreign pulp mill that fuels its operation with black liquor gets help from its government, that’s called a “subsidy”. When a U.S. mill receives money from the federal government for fueling its operation with black liquor, that’s called an “alternative-energy credit”.)

• Verso settlement: Verso’s earnings report last week noted the settlement of a patent dispute with NewPage about a process for making high-bulk coated-groundwood paper. NewPage’s report was silent on the litigation and its settlement.
  

• Other products: The report did not break out results by category for NewPage’s other products, such as supercalendered paper, newsprint, and market pulp. Revenue for those other products in the aggregate was down “only “ 26%.

NewPage and Verso Kiss and Make Up

North America’s two coated-paper giants have decided to stop fighting about who has the right to make high-bulk coated-groundwood papers.

Verso Paper revealed today that NewPage had granted it the right to use a NewPage patent for making high-bulk lightweight-coated (LWC) paper. The legal brouhaha started last summer when NewPage sent Verso a cease-and-desist letter claiming patent infringement and demanding that Verso stop selling its entire line of coated #5 papers.

Verso responded with a lawsuit asking a federal court to declare that it was not breaching the eight-year-old patent that had been issued to a predecessor of NewPage, Consolidated Paper. Verso and NewPage settled out of court in January.

“As part of the settlement, NewPage granted the Company an irrevocable, perpetual, nonexclusive, worldwide, royalty-free, and fully paid-up right and license for any and all purposes under the NewPage patent and any continuation, division, reissue or non-U.S. counterpart of the patent,” Verso stated in a filing today with the Securities and Exchange Commission.

The patent addressed the issue of how to bulk up offset LWC without sacrificing too much gloss (at least 40 on the TAPPI scale). For the most part, the patented method relied on tactics that are widely used among paper mills to bulk up paper – e.g. lower pressure in the supercalenders, use of a gap former, more groundwood pulp, and less coating. A more unusual feature of the patent’s recipe is the use of expensive plastic pigments in the coating “to provide increased stiffness and good gloss."

The patent apparently grew out of requests from publishers of weekly magazines, especially Time Inc., to help them save money on postage by supplying lighter paper without sacrificing bulk or quality. During the past decade, Time Inc., a major customer of both NewPage and Verso, has switched most of its weekly magazines from 32# LWC to 30#, to 28#, back to 30#, and recently to 29# -- at times roiling the entire North American LWC market because of its huge position.

With the settlement, Verso can go about its business as usual, and NewPage has no immediate worries about its patent being declared invalid. But that leaves them two other problems: customers and technology.

Ratebase cuts, shifts to supercalendered paper, and reductions in ad pages have resulted in weekly magazines buying far less high-bulk LWC than they did a few years ago.

And the combination of film coating with online "hot/soft" calendering has proven to be the easiest way to make high-bulk LWC with moderate gloss. Film-coated papers from such mills as Kruger, Catalyst, and SAPPI are often bulkier than the high-bulk sheets coming from companies like NewPage and Verso, which rely on an older, more expensive technology -- blade coating followed by offline supercalendering.

Coated Paper Prices: Headed for a Crash?

If you think prices for coated paper have declined a lot recently, hang on to your hats. A bigger drop may be just around the corner.

Admittedly, the industry has done fairly well managing capacity through the current perfect storm of high inventories, economic recession, strong dollar, and the shift to digital media.

Mills have been more disciplined than in past downturns about taking downtime rather than chasing business with lower prices., limiting the declines to only $5 to $7 per hundredweight since last year's peak.

But the issue is permanent closures, not downtime, as John Maine of RISI explains in a recent analysis: “North American coated paper producers need to shut another 1.3 million tons of capacity permanently and immediately, followed by further shuts over the course of the next five years if they want to balance supply with demand,” he wrote. The continent’s coated mills can make about 9 million tons of paper annually, split about 50-50 between groundwood (mechanical) and freesheet products.

“Most of the high-cost, inefficient mills have already been closed, so the next wave of closures is going to involve larger, more efficient mills that are still generating a positive cash flow,” continues Maine.

The problem is that mills are not shut down by the industry, they are closed by individual paper companies seeking to maximize their owners’ return on investment. What paper company will volunteer to shutter cash-positive mills or machines? Not AbitibiBowater (aka AbitibiUnderwater), which is trying to stave off bankruptcy. Not Verso, North America’s #2 coated producer, which is also stuck in Penny Stock Land.

Maine points to the more “nimble” uncoated-freesheet market, where giants like Domtar and International Paper have implemented massive capacity cuts to prevent prices from crashing. What he doesn’t point out is that the big players in that industry tend to be low-cost producers, which means that smaller players trying to buck the oligopoly with a price war soon find themselves up Chapter 11 Creek without a paddle.

In the coated-groundwood market, by contrast, size doesn’t seem to matter. The best cost position these days is to be making product in Canada with machines that coat and calender in line. Medium-sized Kruger and single-machine Catalyst Paper fit that bill.

The market’s two big players, NewPage and Verso, make all of their coated groundwood in the U.S. with blade coaters and offline calenders – probably with higher costs than some single-machine companies like Domtar and Evergreen Packaging.

NewPage has demonstrated its willingness to keep the market in balance by shutting high-cost mills and machines, but how much stomach does it have for shutting even more (and more efficient) machines? Recent reports of its making uncoated freesheet and an SCB-type product on coated machines suggest its capacity-rationalization plan is complete.

The paper industry has been through down cycles before, often snapping back with rapid price increases once the economy causes demand to recover. Prices may indeed stabilize – even increase -- in a few months when the current inventory overhang is burned off and we enter the busier fall season, especially if the economy improves or energy costs rise. But that’s likely to be what Wall Street calls a “dead cat bounce” – a brief increase on the way to further declines.

“There will be some recovery in demand once the recession is over, but our best forecast indicates that demand will stay far below its pre-recession level and that demand will continue on a structural decline for the next five years,” Maine writes. Translation: Domino, Best Life, Teen People, etc. aren’t coming to life, and retailers like Circuit City and Linens 'n Things won’t magically re-emerge from bankruptcy to start printing more newspaper inserts.

There will be too many coated mills fighting over too little (and declining) demand, with European manufacturers jumping into the fray more as long as the dollar stays strong versus the euro. Even a meeting at a Chicago hotel to discuss “price leadership,” as UPM and Stora executives tried in 2002, won’t rescue this market.

Debt-laden mills will continue running as long as they are cash positive (not necessarily profitable). That will force prices down until the highest-cost machines are no longer cash positive and have to be shuttered. But continuing drops in demand will eventually force even more mills to close.

Manufacturers will try to cope by making uncoated papers on their machines, either on an ad-hoc basis or via permanent conversions. They will diversify more into bio-energy, such as wood-derived ethanol and wood-burning power generation. After all, public opinion and public policy consider it “green” to cut trees for energy (witness the new tax credit for wood-burning stoves) but un-green to cut the same trees to make pulp and paper.

Some makers of coated paper will survive, perhaps even thrive. But the industry will be transformed.