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Rating Action:

Moody's downgrades Verso Paper's CFR to Caa3 and liquidity to SGL-4; ratings remain under review

Global Credit Research - 20 Jun 2014

Approximately $1.4 billion of debt securities affected

Toronto, June 20, 2014 -- Moody's Investors Service downgraded Verso Paper Holdings LLC's ("Verso") corporate family rating (CFR) to Caa3 from B3 and probability of default rating (PDR) to Caa3-PD from Caa2-PD. Verso's liquidity rating was also lowered to SGL-4 from SGL-3. At the same time, Moody's lowered the ratings on Verso's $150 million asset based revolving loan (ABL) to B2 (LGD1 4%) from Ba3 (LGD1 4%), the $50 million revolving credit facility and the $418 million senior secured notes due 2019 rating to Caa1 (LGD2 25%) from Ba3 (LGD2 24%), the $272 million secured notes due 2019 to Caa3 (LGD4 55%) from B3 (LGD4 54%), the $396 million fixed rate second-lien notes to Ca (LGD5 78%) from Caa3 (LGD5 79%), the $13 million floating rate second-lien notes due 2014 to Ca (LGD6 91%) from Caa2 (LGD5 79%) and the $143 million subordinated notes to Ca (LGD6 94%) from Caa3 (LGD6 94%). All of the company's ratings remain under review with direction uncertain. The rating action reflects Moody's view that the announced agreement to acquire NewPage Corporation (NewPage, B1, under review for downgrade) is becoming less likely to occur as the Department of Justice continues its review, and as Verso has been unsuccessful in its distressed exchange offer that's a prerequisite of the acquisition. Therefore, the potential for a higher CFR of the merged company is waning. "We believe it very likely that Verso will default on its debt within the next year, either via a distressed exchange as part of its attempt to acquire NewPage, or via a filing if it fails to acquire NewPage", said Ed Sustar, Moody's lead analyst for Verso.

Downgrades:

..Issuer: Verso Paper Holdings LLC

.... Probability of Default Rating, Downgraded to Caa3-PD from Caa2-PD; Placed Under Review Direction Uncertain

.... Speculative Grade Liquidity Rating, Lowered to SGL-4 from SGL-3

.... Corporate Family Rating, Downgraded to Caa3 from B3; Placed Under Review Direction Uncertain

....Senior Subordinated Regular Bond/Debenture Aug 1, 2016, Downgraded to Ca(LGD6, 94%) from Caa3(LGD6, 94%); Placed Under Review Direction Uncertain

....Senior Secured Bank Credit Facility May 4, 2017, Downgraded to B2(LGD1, 04%) from Ba3(LGD1, 04%); Placed Under Review Direction Uncertain

....Senior Secured Bank Credit Facility May 4, 2017, Downgraded to Caa1(LGD2, 25%) from Ba3(LGD2, 24%); Placed Under Review Direction Uncertain

....Senior Secured Regular Bond/Debenture Aug 1, 2014, Downgraded to Ca(LGD6, 91%) from Caa2(LGD5, 79%) ; Placed Under Review Direction Uncertain

....Senior Secured Regular Bond/Debenture Jan 15, 2019, Downgraded to Caa3(LGD4, 55%) from B3(LGD4, 54%) ; Placed Under Review Direction Uncertain

....Senior Secured Regular Bond/Debenture Feb 1, 2019, Downgraded to Ca(LGD6, 91%) from Caa3(LGD5, 79%) ; Placed Under Review Direction Uncertain

....Senior Secured Regular Bond/Debenture Jan 15, 2019, Downgraded to Caa1(LGD2, 25%) from Ba3(LGD2, 24%); Placed Under Review Direction Uncertain

RATINGS RATIONALE

Verso's Caa3 CFR reflects the elevated risk of a default or distressed exchange in the next 12 months, the company's weak liquidity, high leverage (adjusted leverage over 13x), and the expectation that the company will continue to face secular demand declines and weak prices for most of the grades of coated paper it produces. The rating considers the significant overcapacity in the coated paper industry and the uncertainty of the company's ability to close the previously announced agreement to acquire NewPage. The rating is supported by the company's vertically integrated, relatively low cost asset base and its strong market position as the second largest producer of coated papers in North America.

The downgrade of Verso's speculative grade liquidity rating to SGL-4 reflects the company's continued negative cash flow generation stemming from challenging industry conditions. At March 2014, the company had approximately $4 million of cash and net availability of approximately $45 million under the company's combined $150 million asset based revolving credit facility (ABL) and $50 million revolving credit facility (both maturing May 2017). The company has $13 million of debt maturing over the next twelve months and we estimate that Verso will burn approximately $90 million of cash during this period. With most of Verso's assets secured, the company has limited alternative liquidity. During the second quarter Verso (through one of its wholly-owned subsidiaries) entered into a new $40 million revolving credit facility that matures no later than May 2015. Moody's does not consider this loan as an additional source of liquidity since it matures in less than one year.

Verso's ratings were put on review in January, 2014, following the company's announcement that it had entered an agreement to acquire NewPage. Verso and NewPage continue to work with the Justice Department in terms of antitrust and regulatory compliance issues with the proposed merger. Moody's review will continue to focus on: the proposed capital structure and the anticipated operating and financial performance of Verso, NewPage and the combined company; the integration process and the ability to move funds within the combined company; and the size, pace and allocations of realizable cost synergies. It is anticipated that following the acquisition, Verso and NewPage will be run as separate legal entities with a shared services agreement. The review will assess liquidity arrangements and the combined company's business prospects in the challenging coated paper industry which is experiencing secular decline.

If the merger closes and Verso is able to successfully integrate the operations of NewPage, improve its ability to cope with the declining coated paper industry through improved management of operating capacity and obtain significant synergies, Verso's CFR might be upgraded. If the acquisition does not close, or if Moody's anticipates that Verso will face significant challenges in integrating NewPage, Verso's CFR may be downgraded.

The principal methodology used in this rating was the Global Paper and Forest Products Industry published in October 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Memphis, Tennessee, Verso is the second largest coated paper producer in North America with 8 paper machines at three paper manufacturing mills. In January 2014, Verso announced its intention to acquire NewPage Corporation for $1.4 billion. NewPage is a private company and is the largest coated paper producer in North America with 15 paper machines at 8 paper manufacturing mills. The acquisition is subject to regulatory approvals.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ed Sustar
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S Carter
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's downgrades Verso Paper's CFR to Caa3 and liquidity to SGL-4; ratings remain under review
No Related Data.

 

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