Catalyst Paper Corp. Debt

[Enterprising Investor]

CTLFQ poised to scrap Elk Falls mill, sell three others (3/28/12)

Richmond-based firm urges creditors to take restructuring plan seriously

By Gordon Hamilton, Vancouver Sun March 26, 2012

Catalyst Paper plans to seek court approval today to sell its pulp-and-paper mills to the highest bidder at a bargainbasement price, if its creditors do not approve a restructuring plan similar to one they have already rejected.

In an undated letter to creditors filed in B.C. Supreme Court, Catalyst president Kevin Clarke urges them "to give serious attention" to the restructuring plan. Secured and unsecured creditors are to vote on the plan April 23 in Richmond.

In the event the plan is not accepted, Catalyst has filed a petition seeking approval to enter into an agreement with a so-called "stalking horse bidder" to sell the entire company for a value up to $395 million, the amount of debt held by its secured noteholders. The intent in seeking a stalking horse bidder, not named in the court documents, is to initiate a competitive bidding process.

It has also filed documents in court seeking approval of a deal to sell its mothballed Elk Falls pulp mill at Campbell River. The mill closed in 2010. Catalyst has already negotiated a deal with scrap-metal contractor Schnitzer Steel, the documents state.

The drastic actions outlined in the court documents are the culmination of Catalyst's attempts to reach a deal with creditors to restructure its $810 million in debt.

The Richmond-based pulp and paper maker sought creditor protection Jan. 31 after its secured and unsecured noteholders rejected a plan that would have swapped $645 million of that debt for $325 in new bonds and equity in new shares.

Its secured bonds are now trading at 52 cents on the dollar and its unsecured bonds are trading at less than two cents. Catalyst shares have been de-listed.

In its most recent quarterly financial report, Catalyst wrote down the value of its three coastal pulp-and-paper mills and a recycled paper mill in Arizona to $385 million, mills that as recently as three years ago were valued at more than $2 billion.

The downfall of a business that was once the heart of the mighty coastal pulp-and-paper business was inevitable, said financial analyst Kevin Mason, of ERA Forest Products Research.

Most of North America's paper giants are either in some form of bankruptcy protection or emerging from it.

"It's plain and simple: Just take a look at demand for newsprint and paper in North America," Mason said.

"We are witnessing monster value destruction of a capitalintensive industry that carries a lot of debt."

Mason said the difficulty for bondholders is that there are wide differences of opinion as to what B.C.'s coastal pulp-and-paper industry is worth. The North American newsprint industry has already taken significant double-digit hits to demand. The telephone directory business dropped 20 per cent in 2011 alone. Pulp, which was selling for record prices last year, is now in a slump, adding further difficulty in setting a value for the mills.

Mason said selling the Elk Falls mill for scrap is its most likely fate because demand in North America for its paper machines is non-existent and Asian buyers are unlikely to be attracted.

Its product line doesn't fit the Asian demand profile, he said.

Karen Cooling, a spokeswoman for the Communications, Energy and Paperworkers Union of Canada, the largest of two unions at the remaining three B.C. mills, said the prospect of the Elk Falls mill being dismantled is troubling.

"It takes away some hope from Campbell River," she said, "and it raises the potential for all those mills being shut down and scrapped."

One piece of news that might improve chances of the company's creditors agreeing to swap debt for equity, Mason said, is that Catalyst recently reached labour agreements with unions representing workers at the company's remaining Crofton, Port Alberni and Powell River mills. The 1,080 workers have accepted a 10-per-cent reduction in hourly rates along with adjustments to vacation, health benefits and work rules.

Catalyst Paper estimates the labour agreements will save $18 million to $20 million a year.

Clarke said in a news release that the fact that the unions signed the agreements demonstrates that workers are "taking action to save jobs and ensure we have a viable and competitive business for the future."

Cooling said workers weighed what is "fair and reasonable" in deciding to sign concessionary contracts.

"Our members in those locals do acknowledge all the challenges that Catalyst is facing and that the industry is facing," she said.

"They did it for themselves, for their communities, and so there can continue to be a pulp and paper industry in this province."

Mason said a savings of $20 million a year can add significantly to the value of the company as it will boost cash flow projections and be included in the numbers analysts use in valuing the ongoing businesses.

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