April 6, 2012 / 6:25 PM / 5 years ago

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.

Our Standards:The Thomson Reuters Trust Principles.
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