AbitibiBowater files for bankruptcy protection

[KFRCanuk]

http://finance.yahoo.com/news/AbitibiBowater-files-for-apf-14945598.html

NEW YORK (AP) -- AbitibiBowater Inc., the world's largest newsprint maker, is filing for bankruptcy court protection in Canada and the U.S.

 

The company said Thursday "there are no viable alternatives to its previously announced proposed refinancing ... and as a result (it) has determined that the best course of action is to pursue its overall restructuring under court supervision in the United States and Canada."

 

It has arranged with Fairfax Financial Holdings Ltd. and Avenue Management LLC for debtor-in-possession financing of about $200 million.

 

I wonder what FFH will be left with. Is it still possible that they come up positive over the long term?

[Partner24]

I'm far from being an expert on bankruptcy and liquidation issues. What do I know is that usually convertible debentures are not the first on the food chain (taxes to be paid if any, garanteed debt, etc. are well before). I don't understand about that 200 millions $ financing neither.

 

Insight would be appreciated.

[Hoodlum]

http://www.theglobeandmail.com/servlet/story/RTGAM.20090416.WBstreetwise20090416113902/WBStory/WBstreetwise/

 

AbitibiBowater filed for creditor protection early Thursday and announced it has pulled in $200-million of new loans from Fairfax, a Toronto-based insurer, and Avenue Management.

 

These new loans, which need to be approved by the courts, rank at the top of Abitibi's hierarchy of creditors and ensure that North America's largest newsprint company can keep the lights on.

 

[Guest kawikaho]

Aren't they holding LVLT debt still too?  I'd be kind of nervous about that one.

[SharperDingaan]

 

Very simplistic, but the general approach;

 

DIP financers provide a line of credit secured against the operational A/R. As cash is collected it is applied to the credit line. At $50M it'll be secured against maybe $60M of A/R (120%), at $150M maybe $240M of A/R (160%). High fees & relatively low risk.

 

Bondholders/shareholders do a deal.

 

Secured holders take secured paper equal to the current liquidation value of their securing assets, and some kind of unsecured bond/equity with a NPV about equal to their unrealized BV loss. If they take bonds they can amortize the loss forward, if they take equity they have to book the loss immediately (an issue if these bonds have not had a regular MTM)

 

Unsecured holders take primarily new equity, & a small slug of new unsecured debt

 

Shareholders get a very small slug of new equity. Bond holders convert into massive amounts of the current shares (dilution), & then the current shares get consolidated on a 20-40:1 basis into 'new' shares.

 

Lots of positioning

 

SD

   

[woodstove]

Any thoughts on how / whether ABH filing might affect SFK Pulp's supply agreement?

Doesn't ABH get to void / re-negotiate contracts?

[SharperDingaan]

 

Supplier agreements are swiftly re-negotiated (to supply at a lower price) when the seller is supplying goods to the now bankrupt buyer. In this case, ABH is the supplier (wood chips)- & at what is understood to be fairly high price/ton.

 

SFK's Q1 report is coming up, so expect some kind of 'monitoring the situation' comment.

Down the pike a new (& longer term) deal, with lower prices/ton, & the dropping of any 'take or pay' conditions.

 

Net +ve for SFK

 

SD

 

 

 

[woodstove]

Thanks.  I appreciate your perspective.

[Parsad]

New article this morning on Fairfax's investment in Abitibi.  I have to go through Fairfax's old annual reports, but this is going to be a very interesting debtor-in-possession case study to watch, and probably the largest Fairfax has ever been involved with relative to its size.  The largest newsprint manufacturer in North America, and can it be made profitable again in an industry in decline?  Definitely one that the business schools need to watch and see how it unfolds.  Cheers!

 

http://www.globeinvestor.com/servlet/story/GAM.20090417.RABINEXT17ART1939/GIStory/

[ALLYCAT]

Here is some additional news.http://www.reuters.com/article/marketsNews/idINN1733628820090417?rpc=44

[Redskin212]

Looks like Fairfax will play a big role in the bankruptcy proceeding:

 

AbitibiBowater Gets Access To $206M In DIP Cash

New York (April 20, 2009) -- A federal bankruptcy judge presiding over the restructuring of AbitibiBowater Inc., North America's largest newsprint producer, has approved $206 million in debtor-in-possession financing from investment firm Fairfax Financial Holdings Ltd. and hedge fund Avenue Investments LP.

 

 

[Smazz]

Can anyone offer "stupid guy" notes for me on any aspects of DIP some of us may not be aware of? Or is it all mostly wisiwig?

[Uccmal]

Smazz, I too am a little in the dark on this topic.  I need an english translation.

 

This helps a little:

 

http://business.theglobeandmail.com/servlet/story/RTGAM.20090421.wlawmain0421/BNStory/robLawPage/home

[Smazz]

thanks Al,

will take a look.

[Uccmal]

One thing is for sure.  Having this circus in the headlines isn't helpng Fairfax stock one bit. 

 

 

[Smazz]

The flip side is other holdings seem to be riding the wave. If you feel more confident in FFH or subs and see a higher IV - great time to make a move assuming you're allright with the increased weighting.

 

Im noticing ORH seems to go counter the CAD/US

[Uccmal]

great time to make a move assuming you're allright with the increased weighting.

 

Not a chance the volatility is killing me.  Its all the leaps. 

 

I am also of the opinion that I have had years of chances to buy this stock at a bargain and now want my just reward of FFH.  (F- Financial Heaven). 

[Smazz]

Not a chance the volatility is killing me.  Its all the leaps. 

 

Al, are you trying to find high spots to get out of the Leaps?

[oldye]

http://www.newswire.ca/en/releases/archive/April2009/27/c5216.html

 

Looks like you guys were right, the contract was canceled. 

[woodstove]

Error in my thinking ... I was ok with contract being cancelled, and renegotiated, but omitted to consider that cancellation might put SFK in default on their debt covenants.  Anyway, sold the SFK.DB today, and small residual position in SFK.UN.  Anticipate that JUne/09 interest on the debentures might not be paid in cash, instead turn into an accrual.  May revisit when circumstances clarify (decline due to uncertainty re contract renegotiation, possible suspension of cash interest on debentures, whatever - then followed by developing clarity and comfort). Still like the company and business, but not willing to stand in way of what seems very probable selldown over next 60 days.

[SharperDingaan]

 

Keep in mind that there's now a lot going on with SFK.

 

The big mystery is what SFK's Q1 P&L is likely to look like when they're selling down inventory and only producing at 2/3 of 'normal' production, in what is one of their strongest quarters. Cash flow & ratios have probably improved, but the P&L? - maybe a 50/50 bet.

 

The chips will continued to get supplied, but now at a much lower cost, and sooner. The question is whether it'll be through a long term contract, sale/lease back through an intermediary, or via an outright acquisition. Our own inclination is some kind of lease and future buyout.

 

Net upward bias, but expect some bumps

 

SD

 

 

 

 

[Cardboard]

"The chips will continued to get supplied, but now at a much lower cost, and sooner. The question is whether it'll be through a long term contract, sale/lease back through an intermediary, or via an outright acquisition. Our own inclination is some kind of lease and future buyout."

 

Sorry SD, but I am having a hard time sharing your enthusiasm. Abitibi is supplying 80% of the fibre to the St-Felicien mill and they are now disputing pricing which is linked to the price of pulp in their 20 year contract. However, it is not only the price of that supply that bothers Abitibi, but the supply of it all together.

 

Most of Abitibi sawmills are operating in the red these days with lumber in crisis. On top of that, Quebec is now known as a very high cost producer of lumber due to restrictive harvesting rules, high labour cost and small/slow growing trees due to its climate. Then you have a very punitive trade agreement with the U.S. during tough times. Unless some conditions change dramatically and quickly, it is quite likely that Abitibi will permanently close these unprofitable sawmills during its bankruptcy proceedings.

 

Cardboard

[SharperDingaan]

 

Granted we may be a little outside the box on this,

but consider SFK's options.

 

St Feliceon could afford to pay a slight premium over the current spot, in return for a secure fibre supply over the next 'X' years. Location & trucking costs dictate that the seller would probably use either the ABH lands or something closer. With spot fibre prices this low there will be significant savings, & with local conditions so bad - there will be someone willing to sell, if only to survive..... But this is the MOST that St Feliceon would pay. 

 

St Feliceon could also buy the land outright & contract someone else to seasonally cut down & deliver the logs. The fibre cost is now the cost of capital on the acquisition debt + the contactor cost + tree replanting cost (vs cap cost amortization). Given the cheap cost, cheap financing, & local proximity this could well be the LOWEST cost option. A debt/equity conversion could swing it ... but at 20% cost of capital there may be better ways.

 

But if someone else bought the land - & then offered St Feliceon an operating/capital lease with an option to buy, we could have something. And if the buy-out is 5-10 years out - SFK's cost of capital may not only be materially lower then, but they're also financially stronger. 

 

St Feliceon is one of the lowest cost plants there is, despite paying some of the highest fibre costs in the industry. Lower the fiber cost & it suddenly becomes very profitable. And if your cost is low enough you can do bulk sales to other suppliers whose costs are higher than yours - & extract the economies of scale .... & in a market that is helping, versus hindering you.

 

This is a simple capital allocation problem, & SFK has master capital allocators behind them.

Hard not to be optimistic!

 

SD

 

 

 

 

[Viking]

I wonder how the Quebec government will impact the process. You have an facility that has spent considerable money to remain relatively current and efficient; they just need chips at reasonable cost. What I am learning is how, during one-in-50-year storm, things can go south fast on well run companies. Amazing!

[oldye]

"What I am learning is how, during one-in-50-year storm, things can go south fast on well run companies. Amazing!"

 

Sfk was supposed to be my hedge on the price of oil.  Oil goes down, CAD goes down, costs drop and sales  in cad shoot up..definitely has the potential of paying 60 cents a year in dividends.  Then came shock in demand... Bam...my 20 cent dollar is now selling for 10 cents.