The proposed notes are guaranteed and secured on the same basis as the
existing senior secured debt. The EUR350 million senior secured RCF, the EUR25
million loan from Oesterreichische Kontrollbank AG (AA+/Negative/A-1+), and
the various senior secured notes (including the proposed notes) share the same
security package. This package comprises share pledges over certain material
subsidiaries, pledges over certain U.S. inventories, and a first charge over
certain property, plant, and equipment.
The documentation for the proposed $400 million and $300 million senior
secured notes restricts, among other things, Sappi’s ability to raise
additional debt, pay dividends, sell certain assets, or merge with other
entities. However, the documentation for the proposed notes allows Sappi to
raise new debt if its fixed-charge coverage ratio is more than 2.0x. The
documentation also allows the issue of additional secured debt if the
consolidated secured leverage ratio is less than 2.5x. Aside from these
conditions, the permitted liens covenant allows for liens securing obligations
of no more than $175 million in aggregate at any time; a credit facility of up
to EUR1.3 billion; and up to South African rand (ZAR) 7.5 billion of total debt
incurred by South African subsidiaries.
The proposed senior secured notes benefit from a change-of-control clause and
a cross-default clause (for any unpaid amount of more than EUR25 million), and
will not have any financial maintenance covenants.
The documentation for the EUR350 million RCF contains a set of financial and
nonfinancial covenants. The maintenance covenants include quarterly tests of
the fixed-charge coverage and leverage ratios. The incurrence covenants
include a negative pledge clause; a carve-out restricting the granting of
security over EUR100 million; and limitations on mergers, acquisitions, and
disposals. There is also a limit on additional indebtedness of EUR75 million at
the subsidiary level, plus up to ZAR7.5 billion of total debt incurred by
South African subsidiaries.
The $350 million and EUR250 million senior secured notes due in 2021 and 2018,
respectively, benefit from the same documentation as for the proposed senior
secured notes. It includes limitations on the incurrence of indebtedness as
long as no default has occurred or would occur as a consequence, and as long
as the pro forma consolidated fixed-charge coverage ratio is greater than
2.0x. (In June 2011, we estimated this ratio at about 2.47x.) Sappi can raise
further debt without complying with this ratio if the debt is a credit
facility of up to EUR1.3 billion (including the EUR350 million RCF); or up to
ZAR7.5 billion raised by South African subsidiaries. Over and above these
conditions, the permitted liens covenant allows for liens totalling no more
than $175 million at any time.
The $250 million unsecured notes due in 2032 (outstanding amount $221 million)
contain limitations on sale-and-leaseback transactions and mergers and
acquisitions, a limit on liens, and a cross-default covenant.
To calculate recoveries, we simulate a default scenario. We use a
going-concern approach to reflect our view of Sappi’s strong cost and market
positions in the coated paper and chemical cellulose industries, good
geographic diversification, and prospects for positive free operating cash
flow generation. We base our default scenario on our assumption of a
cumulative revenue decline between 2012 and 2016, as a result of weakening
demand in the paper markets. Weak operating performance is underpinned by our
assumption of:
— Overall economic weakness;
Continued…
