From a financial point of view, Verso Paper’s decision to close its Bucksport mill is a smart move, according to the analyst at Moody’s Investors Service who follows the company.
On Friday, the ratings agency released what’s known as an “issuer comment” that calls the mill closure, announced Oct. 1, and layoffs of more than 500 people by year’s end “a credit positive” event. Verso also operates a paper mill in Jay and is in the process of acquiring NewPage Holdings, which has a paper mill in Rumford, in a deal worth $1.4 billion.
The Bucksport mill produces glossy paper for magazines and catalogs. It is Verso’s highest-cost mill and has been losing money for years, said Ed Sustar, the vice president and senior credit officer for Moody’s Canada who wrote the issuer comment. The closure will help the company stop burning through cash and improve its long-term financial picture, he said.
Sustar acknowledged that it sounds odd to talk about a mill closure as “credit positive,” but said Verso is in a dire situation. In June, Moody’s downgraded Verso’s bond rating from B3 to Caa3, a change that reflects Moody’s belief that Verso’s debt obligations are “judged to be of poor standing and are subject to very high credit risk.”
Basically, Verso is on the edge of default, Sustar said. If the merger with NewPage is not successful, Sustar expects Verso is headed for bankruptcy. But even if the merger goes forward, Moody’s would consider it a “limited default” because the deal includes a debt exchange offer that results in debt holders not receiving all the principal that was promised. The U.S. Department of Justice is currently reviewing the deal for antitrust concerns.
“We’ve got (Verso) rated as far down as we can,” Sustar said. “They are the lowest-rated forest-paper products company we rate in North America, so we’re starting out with a company with a very low credit rating.”
That’s why the closure makes sense, he said. Although it will incur some short-term costs associated with the closure, the long-term effects on the company’s bottom line will be a benefit, Sustar said. Verso estimates that the closure of the Bucksport mill will cost $35 million to $45 million.
Besides saving money, the closure also will help the remaining coated-paper mills by reducing supply. Verso’s coated groundwood and specialty-paper production capacity will decrease by roughly 28 percent. It also reduces by about 10 percent the total North American coated capacity, a grade of paper that Moody’s expects to decline by about 6 percent per year going forward.
“The industry should be in a better balance on a supply-demand basis by taking this excess capacity out of the marketplace,” Sustar said. “It will help all remaining mills that sell this product.”
Those other mills include Verso’s Androscoggin Mill in Jay and NewPage’s mill in Rumford.
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