Apollo Management, Avenue Capital and Franklin Templeton are consolidating more than 50% of NewPage’s USD 1bn worth of second lien bonds, four persons familiar with the matter told Debtwire. The vulture trio’s bet is that the second liens will prove the fulcrum in a near-term restructuring.

Taking over the struggling coated paper producer would align strategically with Apollo’s and Avenue’s other investments in the industry. Apollo controls Verso Paper, while Avenue is a lender and creditor to bankrupt AbitibiBowater and will hold a large stake in the company upon exit from Chapter 11, the sources said.

Apollo, Avenue and NewPage’s equity sponsor Cerberus Capital Management, declined to comment. Calls to officials at Franklin and NewPage were not returned.

NewPage faces a real threat of running out of cash this year, said three buysiders and two sellside analysts. Stripping out the USD 304m one-time benefit the company received from the IRS’ black liquor tax credit that expired in December, NewPage’s underlying EBITDA in 2009 totalled USD 84m, down 86% from USD 584m generated in 2008. Over the same time period, liquidity fell to USD 223m at YE09, down from USD 344m at YE08.

The company will struggle to generate positive EBITDA in 1H10, and with USD 30m of projected capex and USD 180m of interest costs, Newpage could burn through its available funds quite quickly, said the buysiders and analysts. Management did pad its cash pile last week by issuing a USD 70m first lien incremental add-on.

Cerberus has several balance sheet levers it can pull to buy more time. The sponsor has amassed majority positions at the unsecured bottom of NewPage’s capital structure by buying its USD 150m 12% senior sub notes due 2013, and its USD 196m L+700bps senior unsecured PIK notes due 2013. The fund could tender the notes back to the company, and use its own cash augmented by USD 150m of prospective asset sale proceeds to sweeten a de-leveraging exchange of the second lien notes.

However, given the control positions in the seconds accumulated by aggressive hedge funds, any exchange offer that doesn’t involve giving up the equity keys will prove challenging to execute, the buysiders said.

Financial advisors are reaching out to second lien bond holders to open dialogue with management before a steep USD 160m interest tab falls due in 2Q09. However no formal broad organization of the class has taken hold, said a source familiar and a buysider.

NewPage’s USD 804m 10% second lien notes due 2012 traded at 60.5 last week, from 56 on 23 February, according to MarketAxess. Its USD 225m L+625bps second lien notes due 2012 last traded at 55 on 2 March from 59 on 26 January.

The USD 150m 12% senior sub notes due 2013 have been trading in small lots in the mid-30s for the past month. The USD 196m L+700bps senior unsecured PIK notes due 2013 last traded at 15 on 25 November.

Rolling up the paper

If NewPage’s well runs dry, Apollo is in a prime position to benefit from the spoils.

The firms loan- to-own strategy in NewPage puts into play a potential synergistic payoff with its Verso Paper portfolio company, noted one of the person familiar, several buysiders and sellside analysts. Between the two of them, NewPage and Verso control 55% of coated free sheet and 50% of coated ground wood paper production in North America, according to trade service Resource Information Systems Inc (RISI).

Together, Verso and NewPage reported USD 4.7bn of revenue in 2009. Assuming a conservative 4% of revenue synergy rate, a pairing of the two companies could unlock an additional USD 188m of revenue, said two buysiders and one sellside analyst. More important, the ability to control supply would usher in much needed pricing power to the struggling manufacturers, they added.

As for Avenue, an ownership stake in NewPage could further consolidate the ground wood and supercalendered paper grades AbitibiBowater produces. AbitibiBowater controls 15% of coated ground wood paper production in NorthAmerica and is the leading producer of supercalendered paper with 28% market share. Newpage is number two supercalandered producer with a 21% market share, according to RISI.

Granted, any transaction that involves the potential for such massive consolidation will invite heavy scrutiny from antitrust regulators. But the radical repricing afflicting the paper industry will play in Apollo’s and Avenu’s favor.

The possible consolidation of 50% of one paper grade may seem aggressive, but the Department of Justice typically focuses on the pricing impact of a merger over the consolidation of market share, said an antitrust lawyer. “If there is secular decline and there are other technologies coming online that will keep pricing from going through the roof after the merger, that can justify a merger,” the lawyer said.

The DOJ approved the 2007 merger of Abitibi and Bowater, which consolidated 47% of North America’s newsprint capacity. That deal went through with only one mill divestiture required, dropping the combined company’s market share to 45%.

Source www.ft.com