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In context:

Paper shredder

Shares in paper manufacturer Paperlinx slumped more than 20 per cent on Friday after announcing that it was unable to complete its planned European asset sales by year end and would therefore be in breech of its lending covenants.

The potential breech had been flagged just over two months ago, when it raised $188 million in a major equity raising, but at the time it was confident that the sales would be completed.

It said in October that it had budgeted for a profit from the sale of its European property assets. But if it failed to reap the profit, it would breach its interest cover covenant. It says now it is in talks with its bankers.

Paperlinx has hired Macquarie Group to conduct a review of its Australian Paper division, with several trade and private equity buyers currently doing due diligence on the purchase of some or all of these assets. However, it has said before it is unlikely to meet the current $1.12 billion carrying value of the assets, and any sale is likely to result in a “material” one-off loss.

Macquarie and Deutsche Bank were co-lead managers of the equity issue. The company sought up to $200 million from institutions and $100 million from small investors, but received only $150 million from institutions and $38 million from retail investors.

The offer price was set at $1.25 a share, a 29 per cent discount to the prevailing Paperlinx share price of $1.75. The company’s stock was down 24 cents to 82 cents in morning trade on Friday.

Paperlinx says its lending covenants have come under pressure because of the costs of its investment in its Maryvale Mill pulp upgrade, which ran way over budget, and the minimal earnings it has generated from this investment.

It expects second half earnings to benefit from “increased incremental benefits” from the Maryvale upgrade, along with recent increases to Australian dollar pricing, translation of overseas earnings, and improved receipts from the sale of Australian exports.

But it says market volatility and the deterioration in general external conditions could also negatively impact earnings, along with a slump in the global paper market, currency movements and company initiatives including the previously announced profit protection plans.

http://www.businessspectator.com.au/bs.nsf/Article/Paper-shredder-$pd20081219-MG2M5?OpenDocument