TEXT-S&P comments on Verso Paper Holdings LLC
July 3 - Standard & Poor's Ratings Services said today its ratings on Memphis, Tenn.-based coated paper producer Verso Paper Holdings LLC (Verso Paper; B/Stable/--) are not immediately affected by the company's announcement that it could pursue a potential business combination with NewPage Corp. (D/--/--) as part of a consensual plan of reorganization in NewPage's Chapter 11 bankruptcy proceedings. At this time, we believe there is substantial uncertainty that such a proposed combination could occur given that NewPage disclosed today that it has been advised that the first-lien noteholder group did not support the proposed combination and that NewPage does not anticipate further discussions regarding this proposal. However, if a proposal for a combination were to become more likely to occur then we would reassess any potential ratings impact for Verso Paper, including any possible synergy benefits and deleveraging through a business combination of the two largest coated paper manufacturers in North America. The 'B' corporate credit rating on Verso Paper reflects our 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 Verso's liquidity to remain "adequate," attributable to its cash position, new credit facilities, and manageable near-term debt maturity profile following its recently completed exchange offers. Under the proposed plan of reorganization, NewPage's first-lien noteholders will receive $1.425 billion of value, or an estimated 83% recovery, consisting of $1.075 billion of new Verso Paper first-lien notes, $150 million of Verso Paper common stock, and $200 million of cash. The proposed transaction would also include a 100% recovery in cash to repay NewPage's debtor-in-possession financing. Verso Paper plans to raise new first-lien debt to repay in cash some or all of the new Verso Paper first-lien notes at the closing of the proposed transaction. In addition, Verso Paper Finance Holdings' PIK term loan due February 2013 is to be refinanced with a new maturity date no earlier than 2019. Pro forma for the combination, Verso Paper's management estimates net leverage through first-lien debt to be approximately 2.5x. Furthermore, management estimates identifiable cost synergies of $125 million to $150 million, or 2.4% to 2.9% of combined sales.
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