Editor’s note: The Commercial Appeal, a newspaper in Memphis, where Verso Corp. is headquartered, ran this analysis in late August detailing the company’s challenges and debts. It’s reprinted with permission.

Verso Corp.’s stock price has fallen to 25 cents per share from $3.43 at the end of December, a fall so steep it’s like an obituary for the Memphis papermaker.

In an era when catalogs and magazines are moving online, Verso lives on a lifeline from its lenders after losing nearly $700 million over the last five years. Yet the city’s smallest public company faces a new challenge: It must amass $120 million by early February for two interest payments on its debt.

“The market is betting against them,” said Penn Capital Management bond analyst Howard Bryerman. “They’re not betting Verso is going to close its door but they are betting the capital structure needs to be reorganized’’ in a Chapter 11 bankruptcy reorganization or prepackaged bankruptcy to wipe out debts.

Verso, which hired Georgia-Pacific LLC executive David Paterson in 2012 to engineer a turnaround, on Thursday announced 600 mill workers will be let go late this year at Wickliffe, Kentucky and Jay, Maine. The layoffs, which amount to 12 percent of the company’s workforce of 5,000, are blamed on rising paper imports and falling demand at Verso, the nation’s leading producer of glossy paper for magazines and catalogs.

Unlike other businesses that grew up in Memphis and count a lot of Memphians as shareholders, Verso is an offspring of high finance and consolidation in the forest products industry led by Wall Street investors. Although major league investment bankers are providing the lifeline, analysts say not all of them agree the Memphis company should steer clear of bankruptcy.

During this daunting time for the company, a business carved out of International Paper Co. of Memphis in 2006, at least one contrarian figures Paterson can buck the odds and keep Verso out of bankruptcy court.

“I personally believe they need time,’’ said Bryerman, a senior analyst for the Philadelphia firm. “Wall Street is impatient. But they just put the companies together. He needs time to integrate them.”

Integration refers to Verso’s $1.4 billion January buyout of larger Ohio rival NewPage Holdings. Verso intends to reduce production capacity, jobs and costs, then run the orders from customers of the two companies through fewer plants. Paterson calculates the merger can save $175 million per year.

First, though, come the hurdles: January’s interest payment of $90 million will be followed in two weeks by a payment of about $30 million. Bryerman isn’t alarmed. He said Paterson can tap NewPage for new loans. The Ohio company, now a Verso subsidiary, recently arranged a $60 million loan to Verso secured by machinery in Verso’s mill at Jay, Maine.

“Verso on its own doesn’t have any money they can use to service the amount of debt they have on their balance sheet,” Bryerman said. “They can look to NewPage for liquidity.’’

NewPage loans could keep Verso rolling long enough for the savings from the merger to help. One sign of what’s possible appears in the revenue figures. Verso’s typical quarterly sales fell to about $300 million last year from about $450 million in 2008, and were up to $778 million in the second quarter with NewPage in the mix.

Despite Bryerman’s optimistic outlook, Paterson acknowledges some investors are leery. “It’s not illogical to be concerned,” he said Friday, and added: “We feel confident we can manage.”

If the company folds, its impact on Memphis appears minimal. The East Memphis headquarters in an office complex off Knight Arnold employs about 100 workers, while eight mills employ most of the other 4,900. No mills are in the Mid-South.

Taking the brunt of a bankruptcy could be Verso’s leading stockholder, Apollo Global Management. The giant New York investor paid International Paper $1.4 billion for the business in 2006. Within two years, Verso stock rose above $9 per share. Then profits withered as the recession, online media and the strong dollar (which stifled exports and opened the way for rival’s imports) cut earnings.

Apollo looked to merge its Memphis company with an Ohio paper business created by Wall Street neighbor Cerberus Capital Management. Cerberus launched NewPage in 2005 out of remnants of better known paper companies, including Mead Corp. of Dayton, Ohio, which originated in 1846, West Virginia Pulp and Paper, and Consolidated Paper in Wisconsin.

Standing behind Verso and NewPage are investment bankers with different aims. For example, Oaktree Capital of Los Angeles (where principal Steve Kaplan is a Memphis Grizzlies part owner) and Contrarian Capital of Greenwich, Conn., are among the NewPage bondholders. Neither firm would comment for this article.

While Verso bankers might be willing to give Paterson more time if he can’t accumulate the $120 million, analysts said, NewPage bondholders could favor Verso’s immediate bankruptcy and might argue the company is worth more broken up and sold off.

“When equity gets this cheap and the bonds are trading at 30 cents on the dollar, the market is telling investors that the stock really has no value,” Bryerman said.

In American companies, a share of stock, also called equity, represents a share of ownership in the business, while bonds are a type of loan from investors to the business. Bonds can be bought and sold like stock.

Verso bonds scheduled to mature in January 2019 traded Friday for 30 cents, down from 98 cents in January before the NewPage deal. This means an investor willing to bet on Verso could buy $1,000 worth of Verso bonds for $300 on Friday and, if the company is open in 2019, get back $1,000 from Verso that year plus 11.75 percent interest.

“What the market is telling you is it does not think the company is going to make it to 2019,” Bryerman said. “If the company were reorganized tomorrow under Chapter 11 the market is saying they’ll get 30 cents on the dollar for the bonds.”

In a Chapter 11 or a prepackaged bankruptcy, the company stays open. Its stock value usually falls to nothing and the shares are wiped out of existence and do not reappear. Bonds under the law tend to have a higher standing in bankruptcy court than stock.

A creditor’s committee, usually led by the bond owners, takes control and can bring in new executives to fix or break up and sell the business. If the company emerges from bankruptcy, it’s usually chartered as a new business. The new business can issue new shares of stock. These shares are usually taken by the bond investors in exchange for their bonds.

Bryerman doubts the bondholders will take control, though he notes Verso’s balance sheet feeds the gloom permeating the bond market. Verso assets totaled $2.9 billion on June 30, including $2 billion worth of mills and machinery, while liabilities surpassed $3.8 billion, including nearly $2.8 billion in long-term debt.

Also feeding the sense of gloom was Verso itself. When the Memphis executives discussed the company with industry analysts in May for the first time after the NewPage purchase, the stock price decline accelerated. Analysts were surprised executives did not try to fully explain how the merger would serve Verso. The chief financial officer, Robert Mundy, later left the company.

‘‘A lot of people reached out to Verso and said, ‘Look you need to do a better job and explain the Verso story and the integration to the investing public,’ ” Bryerman said.

“I’m the first to say we could have done a better job,” Paterson said, though he notes the protracted antitrust review by the U.S. Justice Department pushed the merger’s closing into January, so there was relatively little data available by May.

During a conference call with analysts on Aug. 11 to discuss the second-quarter earnings report (Verso lost $60 million), Paterson explored the synergies of the merger at length.

Verso’s share price immediately ticked up 2 cents to 42 cents per share. Since then the price has dropped. It closed Friday at 25 cents.

“The market is betting against them.” Penn Capital Management bond analyst Howard Bryerman talking about Verso Corp.’s future


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