Share slide becomes run of the millMathew MurphyDecember 22,...

Share slide becomes run of the mill
Mathew Murphy
December 22, 2008

PAPERLINX is under increasing pressure to rush through the sale of an Australian paper plant as it continues meetings with lenders this morning to renegotiate its debt facility.

Talks between the paper manufacturer and a six-bank syndicate were triggered on Friday when PaperlinX said it would breach its debt covenants because of a delay on proceeds from asset sales.

But sources close to the talks were confident it would be able to broker a new deal.

Bankers have been busy in the past few months as companies from OZ Minerals to Babcock & Brown held marathon talks with lenders to extend debt facilities that threatened to unravel.

PaperlinX announced its plans to divest its European assets in February. But late on Friday it said some of the asset sales would not be completed by December 31 as planned.

Earnings would fall 15 per cent short on the previous corresponding period as a result and it would breach its debt covenants.

Sources close to the deal said discussions between PaperlinX and the lending group - including Commonwealth Bank, Westpac, National Australia Bank, ANZ, Deutsche Bank and HSBC - were not "crisis talks".

"Many of the concerns surrounding the risks have been satisfied, but a few issues still need to be worked through this week," the source said.

Putting pressure on the debt facility is the performance of the company's Maryvale pulp mill in Victoria, which recently went through an upgrade.

The company believes the mill will provide robust and positive cash flow in the second half of the financial year. It also expects that a bounce in the Australian dollar, the translation of overseas earnings and better receipts from the sale of Australian exports will contribute to earnings.

But PaperlinX said its earnings were still exposed to deteriorating market conditions.

"Factors specific to the global paper market, currency movements and company initiatives, including the previously announced profit protection plans, could also impact outcomes," the company said.

Last financial year PaperlinX earnings after tax fell 9.8 per cent, from $80.1 million to $72.2 million.

In a note to clients, Credit Suisse lowered its target price for PaperlinX from $1.30 to 75c a share, saying the "financial risks remain too great".

The brokerage also said the worst case scenario was the forced sale of assets.

"The Australian Paper operations (due diligence is already underway) is the most likely candidate, in our view," it said in the note.

"While we understand any bids have fallen well short of PaperlinX's expectations, any negotiating position has now been significantly diminished."

Credit Suisse estimates that given the financial climate, PaperlinX could raise at most $600 million for its Australian Paper assets - a significant discount to book value.

The admission of a breach rattled investors. PaperlinX shares tumbled to their lowest-ever closing on Friday, losing 32 per cent, or 34c, to 72c.

http://business.smh.com.au/business/share-slide-becomes-run-of-the-mill-20081221-72z8.html