From: Harvey Decleration:
Management and Fairfax both considered the 8.00% Convertible Notes to
be a junior equity investment, which would be converted to equity without any debt service
payments made. The strike price of the 8.00% Convertible Notes was $10 per share and ABH’s
stock was trading at $13.79 per share after ABH announced its agreement with Fairfax for the
sale and issuance of the 8.00% Convertible Notes.
Even if Fairfax did not convert the 8.00% Convertible Notes, no one
expected Bowater to have to make payment on the 8.00% Convertible Notes at the time the
8.00% Convertible Notes Guaranty was issued. The 8.00% Convertible Notes were part of a
comprehensive refinancing plan, which, coupled with cost reductions and price increases taking
hold at the time the 8.00% Convertible Notes Guaranty was issued, was projected to provide the
Company with adequate liquidity for the foreseeable future.
Furthermore, our internal projections and industry pricing estimates
showed that Bowater’s financial condition would continue to improve throughout 2008 and
2009. The industry had recovered from then-historic lows in newsprint pricing in the Fall of
2007. We were realizing a series of price increases that were taking hold in the market at the
time the 8.00% Convertible Notes Guaranty was issued due to a very good supply-demand
balance resulting from reduced capacity in the industry as a result of capacity closures and
increased demand in the worldwide market. Indeed, Bowater out-performed its projections from
March through May 2008.
Additionally, Bowater received a clean audit opinion in its 10-K filed on
March 17, 2008, and also received a May 15, 2008 solvency opinion by a respected financial
advisory firm, Houlihan Lokey. Houlihan Lokey concluded that Bowater was solvent even after
accounting for the spin out of two valuable Bowater mills, Coosa Pines and Grenada, which were
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owned by Bowater at the time it issued the 8.00% Convertible Notes Guaranty. In its opinion,
Houlihan Lokey concluded that Bowater was solvent under the “balance sheet” test, the
“unreasonably small capital” test and the “equity” test.
I am advised that the Association of Western Pulp and Paper Workers
("AWPP"), a collective bargaining agent for employees at Ponderay Newsprint Company
("Ponderay"), and certain of Ponderay's employees, objected to confirmation of the Plan,
arguing, inter alia, that the Plan cannot be confirmed because any potential labor strike and
disruption of Ponderay's production impacts the feasibility of the Plan and the Debtors' financial
projections. Ponderay is an unconsolidated partnership in which Debtor Lake Superior Forest
Products Inc. holds a minority interest. While Bowater manages the day-to-day operations for
the Ponderay mill pursuant to a management agreement between Bowater and Ponderay,
Ponderay’s partners are the ones that make material management decisions, including approval
of, and negotiating, labor agreements.
'Courts of bankruptcy are essentially courts of equity, and their proceedings inherently are proceedings in equity.'
