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TEXT-S&P cuts Verso Paper Holdings LLC to 'CC'
May 2, 2012 / 9:25 PM / 6 years ago

TEXT-S&P cuts Verso Paper Holdings LLC to 'CC'

Overview	
     -- U.S. coated paper manufacturer Verso Paper announced an offer to 	
exchange a portion of its senior subordinated notes due 2016 for new secured 	
notes due 2019, which we view as a distressed exchange under our criteria.	
     -- We lowered our corporate credit rating on Verso Paper to 'CC' from 	
'B', and lowered our rating on the subordinated notes due 2016 to 'CC' from 	
'CCC+'.	
     -- We also assigned our 'BB-' issue-level and '1' recovery rating to the 	
company's proposed 11.75% secured notes due 2019. 	
     -- The negative rating outlook reflects the likelihood we would lower the 	
corporate credit rating on Verso Paper to 'SD' (selective default) from 'CC' 	
and the issue-level rating on the senior subordinated notes to 'D' upon 	
completion of the proposed exchange. We have determined we would raise the 	
corporate credit rating to 'B' from 'SD' after the completion of the exchange.	
	
	
Rating Action	
On May 2, 2012, Standard & Poor's Ratings Services lowered its corporate 	
credit rating on Memphis, Tenn.-based coated-paper manufacturer Verso Paper 	
Holdings LLC (Verso Paper) to 'CC' from 'B'. The rating outlook is negative. 	
	
At the same time, we assigned a 'BB-' (two notches higher than the 	
post-exchange corporate credit rating) issue-level rating and a '1' recovery 	
rating to the proposed 11.75% 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 lowered our issue-level rating on the company's $300 million 11.375% 	
senior subordinated notes due 2016 (subordinated notes) to 'CC' from 'CCC+'. 	
The company has offered to issue up to $104.7 million of aggregate principal 	
of 11.75% secured notes due 2019 (exchange notes) in exchange for up to $157.5 	
million of the subordinated notes. 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 due 2019. 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. 	
	
All other issue-level and recovery ratings remain unchanged. If the company 	
issues the proposed exchange notes, we would expect to lower our issue-level 	
rating to 'CCC+' from 'B' and revise the recovery rating to '6' from '3' on 	
the $396 million notes due 2019. The '6' recovery rating indicates our 	
expectation of negligible (0% to 10%) recovery in the event of a payment 	
default. Under our analysis, the 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 proposed exchange notes.	
	
Rationale	
The downgrade follows Verso Paper's announced exchange offer to issue up to 	
$104.7 million aggregate principal amount of the proposed exchange notes in 	
exchange for up to $157.5 million of subordinated notes. According to our 	
criteria, we view this as a "distressed exchange" and tantamount to default. 	
	
According to the offer, each existing holder would receive $665 principal 	
amount (or 67% of par) of the proposed exchange notes and a cash payment of 	
$110 for each $1,000 principal amount of subordinated notes due 2016 they 	
validly tender on or prior to 5:00 p.m. May 8, 2012. Each holder who doesn't 	
validly tender its subordinated notes prior to May 8, 2012, will receive $665 	
principal amount of the proposed exchange notes and a cash payment of $60 for 	
each $1,000 of subordinated notes tendered. Verso Paper has offered to 	
exchange no more than $157.5 million aggregate principal amount of the $300 	
million subordinated notes. As noted, the company has also amended the terms 	
of its existing exchange offer for its second priority secured floating rate 	
notes due 2014 (floating rate notes). Under the amended terms, the company is 	
offering to issue the proposed exchange notes on a dollar-for-dollar basis in 	
exchange for any and all floating rate notes, plus a cash payment of $30 	
million for each $1,000 principal amount of floating rate notes tendered. 	
(Verso had previously proposed to issue 9.75% secured notes due 2019 in 	
exchange for the floating rate notes, including a $50 an early tender payment 	
for each $1,000 principal amount tendered). According to the offer, any 	
exchange notes that Verso issues-whether in exchange for subordinated notes or 	
floating rate notes-would comprise a single class of securities under the same 	
indenture.  	
	
The two announced exchange offers, if successfully completed, would reduce 	
Verso Paper's debt level by approximately $53 million and extend the maturity 	
of a portion of its debt to 2019. After the completion of the proposed debt 	
exchanges, we have determined we would raise our corporate credit ratings to 	
'B' from 'SD'. The post-exchange '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 offers.	
	
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 2.5% 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 (including chemicals, wood, and energy) are less of a 	
headwind in 2012 than in 2011.	
	
Key risks to our forecast include a weak economy or recession that could hurt 	
demand for coated papers over the near term. A material increase in 	
raw-material costs 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 about 1.5x 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	
We expect to publish an updated recovery report following completion of the 	
exchange offers. In the meantime, for the latest recovery analysis, see 	
Standard & Poor's recovery report on Verso Paper Holdings LLC published March 	
16, 2012.	
	
Outlook	
The rating outlook is negative. If Verso Paper completes the proposed exchange 	
offer, we will lower our corporate credit rating on Verso Paper Holdings LLC 	
to 'SD' and downgrade the 2016 subordinated notes to 'D'. After the debt 	
exchanges, we have determined we would raise our corporate credit ratings to 	
'B' from 'SD' based on the proposed capital structure, our current 2012 EBITDA 	
expectations, and our view of the company's adequate liquidity position.	
	
Related Criteria And Research	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011	
     -- Rating Implications Of Exchange Offers And Similar Restructurings, 	
Update, May 12, 2009	
     -- Key Credit Factors: Criteria For Rating The Forest Products Industry, 	
Dec. 11, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
Ratings List	
Downgraded; Outlook Negative	
                                                To                 From	
Verso Paper Holdings LLC	
 Corporate Credit Rating                        CC/Negative/--     B/Stable/--	
 Subordinated                                   CC                 CCC+	
  Recovery Rating                               6                  6	
	
Verso Paper Finance Holdings LLC	
 Corporate Credit Rating                        CC/Negative/--     B/Stable/--	
	
New Rating	
Verso Paper Inc.	
Verso Paper Holdings LLC	
 Senior Secured	
  US$157.5 mil 11.75% sr secured nts due 2019   BB-                	
   Recovery Rating                              1

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