Bankruptcy battle could leave Newpage overlevered says CreditSights

Newpage’s bankruptcy will be neither simple nor short, predicts credit research firm CreditSights in a new report, and the company that emerges from bankruptcy could still be overleveraged.

Different classes of investors are squaring up for a battle over ownership of the company. The paper company’s private equity owner Cerberus as well as other debt investors such as Oaktree have been actively buying Newpage’s first lien bonds in recent months, says CreditSights, probably with a view to getting an equity stake in the restructured company. The first liens currently trade at around 84 cents in the dollar, which implies that there is some impairment to those debts.

Hedge funds Apollo and Avenue are the biggest holders of the second liens, which currently trade at 12% of par. They will no doubt argue that value breaks at this part of the capital structure and that the second liens should get ownership.

If the second liens and sub notes (currently worth a mere 0.5% of par) are wiped out in the bankruptcy restructuring but the first lien debt remains intact then Newpage would still have leverage of around 4.3 times earnings, says CreditSights. This, says analyst Rahul Gandhi, is still too much leverage in a sector that would be hit badly by a protracted US economic slowdown.

Newpage filed for chapter 11 bankruptcy yesterday, with its Canadian units filing for the Canadian equivalent, CCAA, at the same time.