Norske Skog’s Proposed Recapitalisation Reduces Leverage at the Expense of Current Bondholders
On Monday, Norske Skogindustrier ASA (Norske Skog, Caa3 stable) proposed a recapitalisation that aims to address the company’s unsustainable capital structure. The proposal is credit negative for current bondholders because if the offer were to be accepted, they would incur losses across the entire liability structure. However, the recapitalisation would significantly reduce group leverage to a more sustainable level, materially reduce interest payments and avoid bankruptcy proceedings for which recovery for existing bondholders would be uncertain. The proposed transaction consists of three key components. First, the unsecured notes issued by Norske Skogindustrier ASA and Norske Skog Holding AS, the holding entities of Norske Skog AS, and perpetual notes issued by Norske Skogindustrier ASA (all totalling roughly €500 million at end of June 2017) will be fully equitized. Second, claims of secured securitisation lenders (which totalled €106 million at the end of June 2017) and the secured notes issued by Norske Skog AS (which totalled €308 million at the end of June 2017, including accrued interest) will be exchanged for new senior secured notes with a longer tenor and a face value of €250 million, implying a loss of roughly 40% for secured lenders. Third, the company will make a €40 million new money equity offering available to unsecured noteholders and existing shareholders. Under the terms of the offer, current shareholders would be diluted, with the current secured and unsecured bondholders becoming shareholders in the amount of 94% and 4%, respectively. If the offer is accepted, we estimate that Norske Skog’s pro forma Moody’s-adjusted gross debt/EBITDA (including standard adjustments for pensions, capitalised operating leases and off-balance-sheet securitisation) would improve to a more sustainable 6.0x from 14.8x for the 12 months to June 2017. The smaller debt load also would materially reduce annual interest payments to NOK200 million from NOK600 million currently, thus freeing up capital for an operational restructuring and investments into businesses with underlying growth prospects, such as biogas and wood pellets. Norske Skog’s goal is for growth businesses to contribute 25% of the group’s operating earnings by 2020. Given that structurally declining publication paper currently generates the vast majority of Norske Skog’s operating earnings, the company cannot achieve its goal with its current capital structure. This is because its capital structure does not allow the company to invest beyond maintenance capex owing to its high interest bill. If the offer is not accepted and Norske Skogindustrier ASA files for bankruptcy, secured bondholders are likely to take ownership of Norske Skog AS.
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