Verso Paper ends 2010 with strong liquidity, takes further steps to strengthen balance sheet

By Paul Deckelman

New York, March 3 - Verso Paper Corp. ended 2010 with what its chief executive officer called "the highest liquidity we have had since we started the company," and it has since taken further steps to strengthen its balance sheet in order to be in a financial position to capitalize on expected improvements in conditions in the paper industry, which was hard-hit during the 2009 recession and has slowly improved since then.

Michael A. Jackson, who also doubles as president of the Memphis-based papermaker, anticipates consumer confidence building in 2011 - although he admits that this is a slow process - which should be positive for users of the kind of coated paper Verso makes, such as publishers of magazines and catalog retailers. He also sees a favorable pricing environment, with Verso being able to command prices for its paper "well above" 2010 levels while competition from imports remains flat versus 2010.

"A positive position for 2011 sets us up well for what we believe will also be a solid 2012 as we look forward," Jackson declared during the company's conference call Thursday following the release of results for the 2010 fourth-quarter and full-year periods ended Dec. 31.

Liquidity shows improvement

As of year-end, Verso's total liquidity stood at $352 million, up sequentially from $276 million at the end of the third quarter on Sept. 30 and up as well from $306 million at the end of 2009. Liquidity at year-end consisted of $153 million of cash - about unchanged year-over-year but up from $121 million at the end of the third quarter - plus $27 million of restricted cash and $172 million of undrawn availability on its $200 million revolving credit line, with $28 million drawn against the revolver in letters of credit.

The revolver availability figure was pro-forma for a transaction actually carried out after the start of the new year. Barclays Capital on Feb. 3 assumed the $15.8 million revolver commitment previously held by Lehman Brothers, which had been unavailable to Verso before that due to Lehman's bankruptcy.

Verso's net debt at the end of the year stood at $1.093 billion, actually somewhat higher than the $1.064 billion figure from a year earlier though down from $1.124 billion at the end of the third quarter. The higher 2010 figures included the impact of a $25 million add-on to its 11½% first-priority senior secured notes due 2014 that the company did in January 2010, using the proceeds for capital spending and general corporate purposes. That deal brought the outstanding amount of the first-lien notes up to $350 million.

That was the only significant debt transaction Verso undertook last year.

New deals for a new year

However, once the calendar page turned to 2011, the company swung into action with a series of moves that modestly increased its debt load but significantly cut its interest rates and pushed its maturities outward.

On Jan. 12, the company's Verso Paper Holdings LLC unit priced $360 million of 8¾% second-priority senior secured notes due 2019 at 99.291 to yield 8 7/8%, generating proceeds of $357.45 million. Those proceeds, in turn, were used to fund a concurrently announced tender offer for all $337.08 million of its outstanding 9 1/8% second-priority senior secured notes due 2014.

That tender offer, in which the company offered total consideration of $1,049.38 per $1,000 principal amount, including a $30 per $1,000 early tender payment for those holders tendering by the Jan. 25 early deadline, concluded on Feb. 8. Holders tendered $310.46 million principal amount of the notes, or 92.1% of the outstanding amount, and Verso said that it plans to redeem the small amount of still-remaining notes.

Then on Feb. 7, Verso came to market with a $36 million add-on to the recently issued 8¾% 2019 notes, pricing the issue at 103.25 for an 8.052% yield to worst. During the conference call, Verso's chief financial officer, Robert P. Mundy, noted that the proceeds from the add-on offering had been used to fund a partial redemption of its 2014 senior notes, bringing the total amount outstanding down to $315 million from $350 million at the end of 2010.

Mundy also pointed out to an analyst during the question-and-answer portion of the proceedings that both of the recent 8¾% bond tranches had not only pushed out the maturity of the debt they were replacing by five years, to 2019 from 2014, but in each case, at a considerably lower interest rate.

During the fourth quarter, Verso's interest expense was $31.7 million, down from $33.5 million for the 2009 fourth quarter, with the company attributing the decrease primarily to lower levels of outstanding debt in the fourth quarter of 2010.

However, it said that full-year interest expense was $128.1 million, up from 2009's $123.4 million, with the increase primarily due to higher interest rates on outstanding debt in 2010.

Operating earnings improve

Verso reported a net loss for the fourth quarter of $14 million, or 27 cents per diluted share, versus a year-earlier profit of $18.2 million, or 35 cents per share, although the year-earlier figure includes net benefits of $52.8 million, or $1.01 per share, primarily related to alternative fuel mixture tax credits and net gains related to the early retirement of debt.

Excluding special items, Verso had a net loss for the most recent quarter of $13 million, or 25 cents per share, versus a year-earlier ex-items net loss of $34.6 million, or 66 cents per share.

It said that operating income totaled $17.4 million in the fourth quarter, versus an operating loss of $4.6 million in the year-earlier period.

Net sales increased to $407.7 million in the fourth quarter, up 7% from $381 million in the year-ago fourth quarter.

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