PaperWorks examines asset sale as liquidity thins

by Paunie Samreth, Reshmi Basu, and Jon Berke

PaperWorks Industries tapped SVN International to sell off a recently closed paper mill, said four sources familiar with the situation. A sale, while small, could offset an expected cash burn this year as the issuer examines strategies for addressing the maturity of its entire capital structure in 2019.

Management last month relayed to investors its plans to divest the PaperWorks Philadelphia Mill and related equipment, specifying that they hope to garner around USD 14m of cash from the sale, said three of the sources. However, proceeds for the company would be around USD 10m after taking into account USD 4m of severance costs related to the sale, said the first source.

The Sun Capital Partners owned-company, which makes recycled paperboard and folding cartons, officially closed the Philadelphia mill on 14 April, according to press reports. A sale isn’t expected to close until 2018 given the limited number of buyers, added the first source.

PaperWorks sold its sheeting business for USD 68m in December 2016, which allowed it to repay the USD 54m drawn on its USD 100m revolver, according to a February Moody’s report. The ABL, which is subject to a borrowing base, was subsequently reduced to USD 75m following the asset sale.

Meanwhile, debt backing PaperWorks has softened in recent weeks as investors digest the impact of higher input costs and uncertainty surrounding its ability to refinance the 2019 maturities, said the sources. Costs related to recycled fiber, the main raw material for its core coated recycled board, have jumped in recent quarters while demand for packaged food has been sluggish, according to the Moody’s report.

The issuer’s USD 365m 9.5% senior secured notes due 2019 last traded on 24 April at 77 for a 22.87% yield versus 84 yielding 18.04% on 23 March, according to MarketAxess.

Management previously forecast USD 35m of adjusted EBITDA in 2017, with 1Q17 guided at around USD 1m–USD 3m, said three of the sources. Cost savings and price increases on coated recycled board is expected to boost 4Q17 adjusted EBITDA to around USD 12m–USD 15m, said two of the sources.

That figure compares to its normalized annual adjusted EBITDA figure of USD 45m-USD 50m, said two of the sources. The USD 35m EBITDA figure implies leverage of just over 10x, based on the USD 365m bond.

The projected EBITDA would lead to 2017 cash burn of around USD 7m based on capital expenditure of USD 7m and annual interest expense of USD 35m, said one of the sources. However, real cash burn could be higher since the EBITDA figure is heavily adjusted, two of the sources said.

Furthermore, the projected 2017 capex figure of USD 7m is depressed compared to 2016’s capex of around USD 20m, which was slightly elevated due to certain projects, said one of the sources.

Liquidity at 31 December includes USD 22m of cash and USD 50m available on its USD 75m revolver due August 2019, according to the Moody’s report. The revolver has a capital expenditure covenant and a springing fixed charge covenant of 1x, if availability on the revolver falls below USD 9.375m, the report noted.

The company and SVN did not return calls seeking comment.

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