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.
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