S&P Cuts Verso Paper (VRS) to 'CC'; Cites Two-Part Notes Exchange

Standard & Poor's Ratings Services lowered its corporate credit rating on Memphis, Tenn.-based Verso Paper (NYSE: VRS) to 'CC' from 'CCC'. The outlook is negative.

Concurrently, we took the following actions on the company's issue-level ratings:

• Lowered the issue-level rating on the $150 million asset-based loan (ABL) facility due 2017 to 'CCC' from 'B-' and maintained the '1' recovery rating;
  
• Lowered the issue-level rating on the $50 million cash flow revolving credit facility due 2017 to 'CC' from 'CCC' and maintained the '3' recovery rating;
  
• Lowered the issue level rating on the $417.9 million first-lien notes due 2019 to 'CC' from 'CCC' and maintained the '3' recovery rating;
  
• Lowered the issue level rating on the $271.6 million senior secured notes due 2019 to 'C' from 'CC' and maintained the '6' recovery rating; and
  
• Lowered the issue level rating on the $396 million senior secured second-priority notes and $300 million senior subordinated notes to 'C' from 'CC' and maintained the '6' recovery rating.

"The rating action reflects the announcement that the company plans to conduct a two-part exchange for its senior secured second-priority notes and senior subordinated notes," said Standard & Poor's credit analyst David Kuntz.

The first part will be the exchange of old senior secured second-priority notes and senior subordinated notes to new senior secured second-priority notes and senior subordinated notes on or about Aug. 1, 2014. At the time, certain noteholders that tender after midnight (New York City time) on July 16, 2014, would receive less than their original principal payment. In addition, any accrued and unpaid interest will not be paid on both obligations. The second exchange will occur simultaneously with the consummation of the merger with NewPage Holdings Inc., where both senior secured second-priority and senior subordinated noteholders will realize meaningful reductions in principal. We treat these transactions as tantamount to a default, given the company's current financial condition and since the investors are receiving less than the original promise of the original security.

The "vulnerable" business risk profile reflects our view that Verso Paper faces significant risks associated with North American coated paper markets, which are subject to periods of overcapacity and structurally declining demand. The "highly leveraged" financial risk profile reflects our expectation for further EBITDA declines. We assess Verso Paper's liquidity as "less than adequate" because we believe there is the potential for shortfalls absent the sale of nonstrategic assets.

Our rating outlook is negative. We intend to lower the corporate credit rating to 'SD' and the affected issue-level ratings to 'D' on completion of the first distressed exchange offer. We believe this will occur on or about Aug. 1, 2014. Subsequently, we would assign a corporate credit rating and outlook that would reflect the consummation of the Verso and NewPage merger. This will incorporate our view of the combined company's business and financial risk profile, including the benefit from the proposed debt exchange.

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