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Fitch: Verso Filing Would Propel U.S. TTM Default Rate to 3.7%

January 21, 2016, 07:21 AM
Filed Under: Industry News

An expected Chapter 11 bankruptcy filing by Verso Corp. would boost the mid-January trailing 12-month (TTM) high yield bond default rate to 3.7% from 3.4% at year-end 2015, according to Fitch Ratings. A filing would affect approximately $2.7 billion of total loan and bond debt.

Verso has a multilevel capital structure, which has become unsustainable. The company announced it had elected to exercise the five-day payment grace period for an interest payment on its $731 million NewPage Corp. subsidiary term loan on Jan. 14 and the following day said it would forgo making interest payments on Verso Paper's 11.75% notes, which have a 30-day grace period.

Verso's bankruptcy filing would be the largest in the paper/container sector in over four years since NewPage Corp.'s bankruptcy and would propel the paper/container TTM high yield default rate to 6.4%, above its long-term average 4.4% mark. Fitch does not anticipate widespread paper/container sector defaults. If Verso were to default, it would register as one of the largest recent filings outside of the energy and metals/mining sectors.

Low bid prices on Verso Holding's unsecured bond issues indicate the market's expectations of weak recoveries on their claims in a bankruptcy or distressed debt exchange restructuring. The unsecured bond issues at the holding company were bid at just over a penny on the dollar, and the 11.75% senior secured bonds were offered at pricings ranging from $0.15-$0.18 at the end of Friday. The $731 million first lien term loan at NewPage was bid at $0.36, also indicating well-below-average recovery prospects.

Verso has been struggling from a heavy debt load, weak performance at some mills and a secular decline in market demand for coated papers that is pressuring cash flows. Sales volumes have decreased for papers used to produce magazines and catalogs in the face of competition from electronic publishing and imports. Consensual exchanges completed last year did not sufficiently resolve capital structure issues. Verso has been exploring potential debt restructuring alternatives with a restructuring advisor and holding creditor discussions to address its cash flow and liquidity concerns.

This would be the second trip to bankruptcy court for Verso's NewPage subsidiary, which Verso acquired in January 2015. As a stand-alone company, NewPage filed Chapter 11 in September 2011 and emerged as a privately held company in December 2012. In that reorganization, holders of approximately $1.6 billion of first lien notes converted their notes to new equity and received an approximately 56.6% recovery in the form of the new stock. Second lien debt holders recovered about 6% on their claim in the prior bankruptcy.

For additional information, see "Fitch U.S. High Yield Default Insight: 2016 U.S. High Yield Default Rate Forecast at 4.5%; Energy at 11%," dated December 2015, which is available on

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