Tembec to cut debt

Pulp & Paper, Feb 2008

Under mounting debt pressures and to avert a possible liquidity crisis, Tembec proposed capital structure changes, including a reduction in annual interest rate charges.

If approved, a key benefit of Tembec's proposed plan is that the company's annual interest charges will drop to about $35.8 million from more than $96.9 million, giving it much needed breathing room.

The plan calls for the company to retire all existing common shares, issue 100 million new shares and to convert $1.2 billion in company debt into new equity. In addition, a new $250-300 four-year term loan will be implemented to provide additional liquidity.

Bondholders would own 95% of the new equity issues of 100 million common shares. Existing shareholders would end up with a 5% stake that could rise to a maximum of 15% through the exercise of warrants if the stock reaches approximately $12/share.

Tembec estimates that the planned recapitalization would reduce its annual interest expense by about $67 million by reducing its net debt from $1.4 billion to between $200-250 million.

The company expects to hold separate bondholder and shareholder meetings. Two-thirds votes from both groups are needed for approval.