TEXT-S&P affirms Verso Paper Holdings ratings

April 6 - Overview
-- U.S. coated paper manufacturer Verso Paper announced an offer to
exchange its floating-rate second-lien notes due 2014 for new notes due 2019.
-- We assigned our 'BB-' issue-level and '1' recovery rating to the
company's proposed 9.75% secured notes due 2019.
-- We affirmed all ratings, including the 'B' corporate credit rating, on
Verso Paper.
-- The stable rating outlook reflects our expectation that Verso's
liquidity will remain adequate over the next year, attributable to its cash
position, proposed new credit facilities, and manageable near-term debt
maturity profile following the proposed exchange offer.

Rating Action
On April 6, 2012, Standard & Poor's Ratings Services assigned its 'BB-' (two
notches higher than the corporate credit rating) issue-level rating and a '1'
recovery rating to Memphis-based Verso Paper Holdings LLC's proposed $180.2
million 9.75% secured notes due 2019. The '1' recovery rating indicates our
expectation of very high (90% to 100%) recovery in the event of a payment
default. We also affirmed all ratings, including the 'B' corporate credit
rating, on Verso Paper. The rating outlook is stable.

The company intends to issue the new 9.75% notes due 2019 in exchange for any
and all of its outstanding $180.2 million floating-rate notes due 2014. We
note that the liens securing the floating rate notes and the liens securing
the company's $396 million second-lien 8.75% notes due 2019 currently rank
pari passu. According to the exchange offer materials, the liens securing the
proposed exchange notes would rank ahead of the liens securing the $396
million 8.75% notes. The liens securing the proposed exchange notes would rank
junior to the liens securing the company's $345 million 11.75% notes due 2019,
as well as the proposed new $150 million ABL facility and $50 million
revolving credit facility.

If the company issues the proposed exchange notes, we would expect to revise
the recovery rating to '4' from '3' on the company's $396 million 8.75% notes
due 2019. The '4' recovery rating indicates our expectation of average (30% to
50%) recovery in the event of a payment default. Under our analysis, the $396
million 8.75% notes will have weaker recovery prospects as a result of the
debt exchange, since the liens securing these notes will be subordinated to
the liens securing the new 9.75% notes. The issue-level rating on the $396
million 8.75% notes due 2019 would remain unchanged at 'B'.

Rationale
The rating action follows Verso Paper's announced exchange offer to issue up
to $180.2 million of new 9.75% secured notes due 2019 in exchange for any and
all of the $180.2 million of floating-rate notes due 2014. Verso also
commenced a solicitation of consents from the holders of the 2014
floating-rate notes to authorize release from the liens and security interests
in the collateral securing the 2014 floating-rate notes.

The 'B' corporate credit rating on Verso Paper reflects Standard & Poor's view
of the combination of its "highly leveraged" financial risk and "weak"
business risk. Our ratings incorporate the company's limited product
diversity, substitution risks due to changing customer preferences for greater
electronic content, and vulnerability to fluctuations in input costs and
selling prices. In addition, despite our expectation that credit measures will
remain somewhat weak over the next year, we expect liquidity to remain
adequate, attributable to its cash position, proposed new credit facilities,
and manageable near-term debt maturity profile following the proposed exchange
offer.

Under our baseline scenario for a gradual economic recovery in 2012, we expect
Verso Paper's EBITDA to be $200 million or more, compared with $193 million
generated in 2011. Key assumptions to our EBITDA forecast include:
-- Real GDP growth of 2.1% in 2012 and 2.3% in 2013;
-- Capacity closures and low single-digit percentage declines in coated
paper demand result in lower year-over-year coated paper sales volumes;
-- Coated paper prices remain relatively inline with 2011 average levels
given our view of no material declines in industry operating rates from
current levels; and
-- Input costs are less of a headwind in 2012 than in 2011.

Key risks to our forecast include a weak economy or recession that could
accelerate decreasing demand for coated papers over the near term. A material
increase in raw-material costs, including chemicals, wood, and energy, that is
unable to be offset by price increases or cost savings initiatives could also
significantly reduce profitability. We believe that Verso's financial results
and credit measures will fluctuate widely during the course of a cycle because
demand correlates closely to general economic conditions and highly cyclical
advertising spending.

Total adjusted debt was about $1.35 billion on Dec. 31, 2011, compared with
$1.27 billion at year-end 2010. In March 2012, the company issued $345 million
of 11.75% first priority notes due 2019 to fund the cash tender for its $315
million of notes due 2014. Based on our EBITDA assumptions, we expect Verso
Paper to remain highly leveraged with debt to EBITDA in excess of 6x, compared
with 7x as of Dec. 31, 2011. In addition, interest coverage is likely to
remain below 2x and funds from operations (FFO) to debt less than 10%,
compared with 1.4x and below 5%, respectively, at year-end, 2011.

Verso is the second-largest coated paper manufacturer in North America and
accounts for about 17% of total production capacity. A substantial proportion
of its sales are to catalogs and magazines end users, which we believe are
susceptible to substitution risks due to changing customer preferences for
greater electronic content, particularly with increased penetration of
e-readers and tablet computers.

Liquidity
Our assessment of Verso Paper's adequate liquidity profile is based on the
following assumptions:
-- We expect that sources of liquidity (including FFO, cash balances, and
availability under the new credit facilities) will exceed uses by 1.2x or more
over the next 12 months;
-- We expect that liquidity sources will continue to exceed uses, even if
EBITDA were to decline by 15%; and
-- Verso does not have any maintenance financial covenants governing its
credit facility and notes.

As of Dec. 31, 2011, the company's primary sources of liquidity include about
$95 million of cash and $159 million of availability (net of $41 million of
issued letters of credit) under its current revolving credit facility. The
company has obtained commitments for a new $150 million asset-based lending
facility and $50 million revolving credit facility to replace its existing
bank facility due August 2012. The new bank facilities include a fixed-charge
coverage ratio requirement of 1x if availability falls below a certain
threshold. Given our operating assumptions, we expect the company to generate
positive free cash flow in 2012 after consideration to an estimated $60
million of net capital expenditures and a modest decline in working capital
levels. The company's nearest debt maturity occurs in February 2013 when Verso
Paper Finance Holdings LLC's unsecured term loan is due.

Recovery Analysis
For the complete recovery analysis, see Standard & Poor's recovery report on
Verso Paper to be published on RatingsDirect following the release of this
report.

Outlook
The stable rating outlook reflects our expectation that Verso's liquidity will
remain adequate over the next year, attributable to its cash position,
proposed new credit facilities, and manageable near-term debt maturity profile
following the proposed exchange offer. Our stable rating outlook incorporates
our view that the company will generate positive free cash flow in 2012 based
on our EBITDA expectations and be able to successfully repay or refinance
Verso Paper Finance Holdings LLC's February 2013 term loan maturity.

Based on our EBITDA forecast and outlook for continued demand declines in
coated paper end markets, we view a meaningful improvement in credit measures
from recent levels and positive rating action as unlikely over the next 12
months.

We could take a negative rating action if the secular demand decline in coated
paper were to be worse than expected over the coming years leading us to lower
our assessment of Verso Paper's business risk to "vulnerable" from weak. In
addition, if Verso Paper's EBITDA generation over the next year is unlikely to
be maintained at more than $165 million, a level which approximates our
estimated cash interest expense of about $125 million and maintenance capital
expenditures of approximately $40 million. Under this scenario, liquidity
would likely weaken and the company would likely need to rely on borrowings
under its revolving credit facility to fund operating requirements.

Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Forest Products Industry,
Dec. 11, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Ratings Affirmed
Verso Paper Holdings LLC
Verso Paper Finance Holdings LLC
Corporate Credit Rating B/Stable/--

Verso Paper Holdings LLC
Senior Secured B
Recovery Rating 3
Senior Secured BB-
Recovery Rating 1
Subordinated CCC+
Recovery Rating 6

Verso Paper Finance Holdings LLC
Senior Unsecured CCC+
Recovery Rating 6

Verso Paper Inc.
Senior Secured B
Recovery Rating 3
Senior Secured BB-
Recovery Rating 1

New Rating

Verso Paper Holdings LLC
Verso Paper Inc.
Senior Secured
US$180.2 mil 9.75% sr secd nts due 2019 BB-
Recovery Rating 1

Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.