Norske Skog has in the past entered into Euro denominated energy contracts in Norway, reducing the group's exposure to the Norwegian krone. Financially, a contract combining energy prices and currency exposures is considered a hybrid instrument, containing a host contract and an embedded derivative. A hybrid instrument can be accounted for based on the host contract, or be split and accounted for by their separate elements. Norske Skog previously accounted for such contracts by their separate elements. In Q1 2015 Norske Skog changed the accounting principle to account for the host contract only. The change in accounting principle was agreed with the current auditor EY. However, on 1 April 2016 the company was informed by EY that the Norwegian Financial Supervisory Authority has made a preliminary assessment that such energy contracts should be accounted for by their separate elements.
Norske Skog launches a recapitalization transaction that will significantly reduce the group’s debt level and interest cost, increase the equity value, and position the company to deliver on its future growth strategy. Following consistent investor feedback, Norske Skog has discussed the transaction proposal with major debt and equity investors, and received general support for a transaction, which sees the unsecured bonds equitised.
“After years of managing high debts in declining markets, Norske Skog now has a sustainable business portfolio with very competitive business units. The group generates an acceptable level of cash flow from operations, but too much is consumed by interest payments, leaving little to be reinvested in the existing business. This is a balanced recapitalization proposal that will substantially reduce the group’s debt level and interest expenses, enabling the group to invest both in core business and green growth initiatives. The proposal is clearly in the best interest of all stakeholders and only less beneficial alternatives exist,” said Mr. Lars P.S. Sperre, President and CEO of Norske Skog.
The transaction proposal consists of four conditions that all need to be fulfilled for the transaction to be completed: 1. A maturity extension of the EUR 290 million senior secured notes (SSN) from 2019 to 2021, including a reduction of the coupon rate from 11.75% to 8%. 2. A maturity extension of the EUR 100 million Norwegian Securitisation Facility (NSF) from 2020 to 2022. 3. The exchange of all unsecured bonds and the perpetual notes into equity. There are EUR 345 million and USD 156 million respectively outstanding in unsecured bonds and perpetual notes before the transaction. 4. A rights issue raising up to EUR 70 million in new money to finance the group’s planned improvement and growth projects.
A successful transaction will pro forma reduce the total debt inclusive perpetual notes from NOK 8.7 billion to around NOK 4.2 billion and improve the group’s book equity to approximately NOK 3.5 billion. Existing shareholders will hold 10% of the new book equity following the transaction. Prior to the transaction, existing shareholders are holding 100% of a book equity of NOK 39 million on latest reported figures. The proposal will reduce annual interest cost with approximately NOK 300 million.
“For the transaction to be successful, over 90% bondholders need to accept the proposal, in addition, shareholders must approve the transaction with 2/3 of votes at an extraordinary general meeting . To facilitate full participation among the bondholders, we will endeavour to apply available legal tools to make the transaction binding for any blocking minority, such as UK schemes of arrangement. The transaction proposal provides a balanced recovery for the existing shareholders of Norske Skog and is an attractive opportunity to invest into the new capital structure of Norske Skog,” said Mr. Lars P.S. Sperre, President and CEO of Norske Skog. Norske Skog has struggled with high debts in a challenging industry for several years. However, impressive efforts by employees have contributed to reduced costs and significantly improved the competitiveness of the group.
A deleveraged group will be able to diversify its business through green growth projects in synergy with the existing paper production. Identified growth initiatives include biogas, wood pellets, tissue paper, nanocellulose and production of renewable, fibre-based alternatives to oil-based plastic products. A diversified Norske Skog with a strong balance sheet will also be an attractive European consolidation partner for the publication paper industry in Europe. The early bird consent date for the transaction is on 15 June 2017 and the final consent deadline is on 29 June 2017 (at 23.59 New York time). For a complete description of the transaction, please see the attached presentation and long form transaction announcement.