Paperlinx has dismissed claims by a New York hedge fund that the embattled paper merchant has breached terms relating to its $260 million hybrids that could hand control of the company to the hybrid holders.
In a letter addressed to the hedge fund Blue Pacific, Paperlinx lawyers refuted the claim the company had bypassed hybrid holders by returning capital to shareholders as part of a employee incentive scheme, describing that as "incorrect".
The letter follows a statement by Paperlinx to the Australian Stock Exchange that referred to the suggestion of a breach as "misconceived" while stating it would defend its position vigorously.
Blue Pacific and another US hedge fund Coastal are believed to be the largest holders of the $260 million of outstanding hybrid securities.
Last week, Blue Pacific wrote a letter to the board claiming that its lawyers, Corrs Chambers Westgarth, were of the view that the repurchase of shares in 2013 and 2014 of $100,000 and $300,000 shares constituted a breach.
"Blue Pacific continues to believe the buybacks that occurred had an anti-dilutive effect to ordinary shareholders, which is directly beneficial to ordinary shareholders and not beneficial to [hybrid holders] using consideration ultimately provided by Paperlinx," a spokesperson for the hedge fund told Fairfax Media. "That said, Blue Pacific will happily retract our claim if clear evidence is made available to us that a breach has not occurred."
As Paperlinx has suspended distributions to hybrid holders, the terms prevent any return of capital to ordinary equity holders, until distributions are resumed. Therefore, a share buyback regardless of the size could technically breach the terms of the hybrids, which could require a full payback or a conversion to shares that would give the hybrid holders 94 per cent of the equity.
But Paperlinx lawyers have say the financial statements don't state that the company acquired or reduced its share capital. The purchase of the shares was conducted by an independent trustee company and the company is not the beneficial or legal owner of the shares, the lawyers said. The letter also claims that remuneration of key employees through share transfers does not constitute a breach of the terms. Proof of breach needed
Blue Pacific is run by a former Greenlight Capital analyst Chris Sommers, who worked under legendary activist investor David Einhorn and worked on the fund's short bet against Lehman Brothers before it failed in 2008.
The dispute may have to be managed by the Trust Company, which acts as the "Responsible Entity" for the hybrid holders and will no doubt have to take a view on whether there has, in fact, been a breach.
The breach claim is the latest in a multi-year fight for control between hybrid and ordinary shareholders of the paper merchant in 2007 boasted a market capitalisation of almost $2 billion and extensive international operations. The company has is now 100 times smaller in terms of market capitalisation but a small and profitable local operation remains after an extensive and complex unwinding process.
The company's value could be around $150 million based on annual operating profits of around $15 million, Blue Pacific believes. However, the zombie capital structure has continued to plague the company. Hybrid holders still have priority claims on the company's assets that can never be met given its smaller size, which means a deal must be cut. But neither side can agree on an equitable division of the company despite several attempts from both sides.
While the battle between the various classes of investors has once again flared up, a resolution still does not appear likely as animosity among the two parties shows no sign of abating.
