FGE.to - Fortress Paper (formerly FTP.to)

[bathtime]

(Bah! Another convert.)

 

Fortress Paper arranges $40-million financing

 

Fortress Paper Ltd (C:FTP)

Shares Issued 14,309,693

Last Close 6/18/2012 $20.66

Tuesday June 19 2012 - News Release

 

Mr. Chadwick Wasilenkoff reports

 

FORTRESS PAPER ANNOUNCES $40 MILLION PUBLIC OFFERING OF CONVERTIBLE DEBENTURES

 

Fortress Paper Ltd. has entered into an agreement with a syndicate of underwriters co-led by Raymond James Ltd. and Scotiabank, and including Canaccord Genuity Corp., Dundee Securities Ltd., RBC Capital Markets, TD Securities Inc., CIBC World Markets Inc., Cormark Securities Inc. and Acumen Capital Finance Partners Ltd., pursuant to which the underwriters will purchase a $40-million principal amount of convertible, unsecured, subordinated debentures at a price of $1,000 per debenture. Fortress Paper has also granted the underwriters an over-allotment option to purchase up to an additional $6 million aggregate principal amount of debentures for a period of 30 days following closing to cover over-allotments.

 

The convertible debentures will mature on December 31, 2019 and will accrue interest at the rate of 7.0% per annum payable on a semi-annual basis, commencing December 31, 2012. At the holder's option, the convertible debentures may be converted into common shares in the capital of Fortress Paper at any time up to the maturity date. The conversion price will be $31.00 for each common share, subject to adjustment in certain circumstances.

 

The convertible debentures will be direct, unsecured obligations of Fortress Paper, subordinated to other indebtedness of the Corporation for borrowed money and ranking equally with all other unsecured subordinated indebtedness.

 

The convertible debentures will not be redeemable prior to July 1, 2015. On or after July 1, 2015 and prior to July 1, 2017, the convertible debentures may be redeemed in whole or in part from time to time at the Corporation's option, at a price equal to their principal amount plus accrued and unpaid interest, provided that the current market price for the period ending five trading days preceding the date upon which the notice of redemption is given is at least 125% of the conversion price. After July 1, 2017 and prior to the maturity date, the convertible debentures may be redeemed in whole or in part from time to time at the Corporation's option at a price equal to their principal amount plus accrued and unpaid interest.

 

Subject to specified conditions, Fortress Paper will have the right to repay the outstanding principal amount of the convertible debentures, on maturity or redemption, through the issuance of common shares of the Corporation. Fortress Paper also has the option to satisfy its obligation to pay interest through the issuance and sale of additional common shares of the Corporation.

 

The Corporation intends to use the net proceeds of the financing for: (i) funding of capital expenditures relating to the cogeneration project at the Fortress Specialty Cellulose Mill, (ii) funding of capital expenditures relating to the Lebel-sur-Quevillon Mill, subject to the completion of the acquisition and (iii) working capital and general corporate purposes. Although the Corporation intends to spend the funds available to it as stated above, there may be circumstances, where for sound business reasons, a reallocation of funds may be necessary or advisable. The actual use of available funds may vary depending on the Corporation's operating and capital needs from time to time and will be subject to the discretion of the management of the Corporation.

 

The offering is scheduled to close on or about July 10, 2012 and is subject to certain conditions including, but not limited to, the receipt of all necessary approvals including the approval of the Toronto Stock Exchange.

 

A preliminary short-form prospectus will be filed with securities regulatory authorities in all provinces of Canada.

 

We seek Safe Harbor.

[Liberty]

I feel $31 is low, but it's still about 50% over the current price, so probably about as good as they could have gotten under the circumstances.

[bathtime]

At the end of the day better to be safe and have the spare cash. Preferable to diluting equity at market price, but I hate that converts can put a cap on the stock with institutions buying the convert and shorting the common.

[Liberty]

Here's the reply that I got from FTP:

 

Hi,

 

The 36MW cogen should cost approximately $30 million less than the 50MW version.

 

The upgrade in capacity should cost approximately $20 million to increase projected capacity from 236k to 250k, but we feel the overall the projects are significantly de-risked with this change.

 

Regards,

 

Chris Holland

Fortress Paper

[gokou3]

Potential to increase the share outstanding by 1.3M or 9%.  Sucks, but far from the end of the world, given the huge margin of safety.  Perhaps the market will react positively now that liquidity concern is alleviated.

[triedtestedand]

The pricing is basically the same as what the Fonds is paying for their $25M. Presuming the union votes tomorrow, they're paying 150% of the past 5 days of trading, which will be around 1.5x of ~$21 to $22.  So they pretty much had to price it the same for the new guys.  In this case however they have a longer term duration, so that's good.  And hey ... the 7% coupon is less than the Spaniards paid for their sovereigns today, no?

 

I've got no problem them taking the $40M in this market, having a nice buffer, and removing the liquidity risk.  It shows they can still tap into the markets despite current global uncertainties, which is good.

 

And as far as the dilution is concerned, if weak hands persist, cash flow ramps up as expected, and they have margin of safety, they could conceivably start buying back some shares (not many, and over time) on the open market ... especially if some institution has bought the convertible and shorted the common.

 

That said ... does anyone have access to FTP short interest that they could provide to the board???

[A Dhandho Investor]

That said ... does anyone have access to FTP short interest that they could provide to the board???

 

triedtestedand,

 

Current short interest is 518.700 shares or about 3,6% of total shares outstanding.

[triedtestedand]

Thanks AD!

 

BTW ... LSQ has closed as of today.

 

http://www.digitaljournal.com/pr/761698

[triedtestedand]

PS ... And they've upped the latest convertible debenture offer to $60M from $40M

[tombgrt]

Considering $31 is almost double the price at which I bought more shares at one point a week ago ($17), I don't think conditions are terrible. Sure it's dilution, but the added value from LSQ should be far higher.

 

This is the price FTP pays for playing it too tight, but that is easy to say in hindsight. If Chad thought LSQ with this new convertible included would be a bad deal, I'm quite sure he would call the project off. I'm confident this package is better than the one without LSQ and dilution but hope they delay any further acquisitions for the next year unless they can sell off Dresden or Landqart at a great price.

[prunes]

PS ... And they've upped the latest convertible debenture offer to $60M from $40M

 

They didnt know yesterday that they needed an additional $20 million? Typo? Cash needs changed dramatically?

[triedtestedand]

Prunes:

 

More demand for the bought deal than expected ... so they're taking the cash now.  Could be an extra $23M if you factor in the over-allotment. Heck ... if they're now going to be floating with so much extra cash, that's enough to buy back more than a million shares at these prices (stock's down so far today).

[prunes]

How much of the total equity is FTP putting into LSQ? Looks like it will be between $20 - $29 m of a total $222 m based on the PRs I'm looking at. Anyone have similar figures for Thurso?

 

FTP took down the investor presentation from its website. If anyone has updated stabilized projections for the two mills that they can share it would be greatly appreciated.

[gokou3]

How much of the total equity is FTP putting into LSQ? Looks like it will be between $20 - $29 m of a total $222 m based on the PRs I'm looking at. Anyone have similar figures for Thurso?

 

FTP took down the investor presentation from its website. If anyone has updated stabilized projections for the two mills that they can share it would be greatly appreciated.

 

Attached is the presentation re: LSQ.  I am at work but am pretty sure you can figure out the equity contribution from it.

LSQ_Announcement_Jan_31_2012.pdf

[bathtime]

Trying to do the math on shares out plus what the converts will add. A recent Raymond James report has fully diluted shares out at 15.3m. I think that figure includes issued shares plus stock options.

 

Then we have three convertible debentures. The financing that closed 12/22/11 for Thurso was for $40.25m and stated "The conversion price of the debentures is $37.50 per share, which represents 26.6667 shares for each $1,000 principal amount of debentures." [1000/37.5].

 

12/22/11:  $40.25m is 40,250 debs at $37.50 = 1.07m shares

06/20/12:  $60m is 60,000 debs (possibly more if 9,000 over allotment filled) at $31.00 = 1.94m shares

 

Yet to be issued: $25m debs with Fonds de solidarity FTQ for LSQ, which if I use the same $31.00 price as the current raise = 0.81m shares.

 

All in all that adds up to 18.82m shares out once debs are converted. Let me know if I left anything out or messed up the math!

 

[gokou3]

Just got a trial subscription with CCFGroup http://www.ccfgroup.com/informs/index_prod.php?Class_ID=500000.  Looks like DP prices have now dropped to US$1000/mt, with buyers taking a wait and see approach.  Wonder if FTP's customers still honour their collar?

 

OTOH, VSF spot is at RMB$14400 = US$2264/MT.  That works out to US$1264 for Thurso's contract (spot - $1000)

[bonechip1]

Hi gokou3,

Thanks very much for this info.  I would be very appreciative if you could post the gist of the CCF articles with the headlines "fulida to shut vsf lines" from June 20 and " fulida's turnaround plan not confirmed finally" from June 19.

 

Thanks,

Chip

[gokou3]

Hi gokou3,

Thanks very much for this info.  I would be very appreciative if you could post the gist of the CCF articles with the headlines "fulida to shut vsf lines" from June 20 and " fulida's turnaround plan not confirmed finally" from June 19.

 

Thanks,

Chip

 

Full articles:

 

Fulida to shut VSF lines

Fulida announces that it will shut VSF lines of its Xiaoshan plant on Jul 1 for 15-20 days' turnaround and the operating rate may fall to 30%.

 

 

Fulida's turnaround plan not confirmed finally

Fulida said last week it would shut VSF lines of Xiaoshan plant. It was rumored previously that one line would be shut for turnaround and this morning the plant was rumored to be closed.

 

Executives from Fulida reflect that the turnaround has not been confirmed yet. Some lines may be maintained later and whether the whole plant will be closed depends on market situation.

 

 

 

Btw, just found a Raymond James research report talking about the relationship between Fulida and Fortress:

http://www.andrewjohns.ca/sites/default/files/FTP_20120516%20Due%20Dilligence%20Boosts%20Thurso%20Conversion%20Confidence;.pdf

 

[Liberty]

http://www.theglobeandmail.com/globe-investor/investment-ideas/fortress-paper-playing-the-waiting-game/article4357935/

 

I find it interesting how he was fine recommending the company at twice+ the current price and while the company was a year+ away from shipping DP, while now that it is months from getting full cash-flow from Thurso and the stock is half the price, it's a "wait and see" story. I mean, I understand how the situation doesn't look as good as it once did (macro and micro), but the long-term potential remains very similar, and since you are paying less than half what you used to, the risk/reward profile is probably much better than it was.

[roundball100]

http://www.theglobeandmail.com/globe-investor/investment-ideas/fortress-paper-playing-the-waiting-game/article4357935/

 

I find it interesting how he was fine recommending the company at twice+ the current price and while the company was a year+ away from shipping DP, while now that it is months from getting full cash-flow from Thurso and the stock is half the price, it's a "wait and see" story. I mean, I understand how the situation doesn't look as good as it once did (macro and micro), but the long-term potential remains very similar, and since you are paying less than half what you used to, the risk/reward profile is probably much better than it was.

 

Exactly my thoughts when I read the article in the paper this morning.  ("You pay a high price for certainty ...").  Once it doubles, no doubt everyone will change their recommendations again, so as not to be out of step with other analysts.

[bonechip1]

Thanks again gokou3.  Great info.  Fulida is FTP’s largest customer hence my interest in those 2 articles – I think Fulida takes 36% of FTP production. Not sure what % of capacity Xiaoshan is of total Fulida production. At first glance, I thought the second article may have meant that Fulida was considering shutting in production at Xiaoshan indefinately depending on market conditions. However, re-reading the releases a few times, the way I now read into these 2 news releases is that Fulida are shutting down production of the majority (70%) of the Xiaoshan plant VSF lines for a 15-20 day maintenance turnaround, and depending on market conditions, they may shut the whole plant down for the turnaround and bring back on the full production in 15-20 days (mid to late July). The second release has a rumour element to it (Fulida’s turnaround not confirmed finally), and the more recent release (Fulida to shut VSF lines) seems to be an official release by Fulida from yesterday.

 

Agree on Fabrice Taylor.  I have gotten some value out of reading the free content on his President's Club website, especially his interviews with management, however, I find his scuttlebutt doesn't go much beyond talking to company CEOs.  There certainly are material risks here, but I think the risk/reward is much more in a long's favor now than when Taylor was first recommending FTP. 

[lessthaniv]

I know that Chad has suggested nothing is on the immediate horizon for Dresden but it's still in the back of my mind that this gets sold in the next year or two. The size of the wallpaper market hasn't really grown and as more old school paper orders migrate to the non-woven product the future growth becomes more limited. I think Chad's MO will be to liquidate this soon with a little growth left for the buyer to maximize the multiple.

 

Liquidating this would solve many problems.

 

 

[tombgrt]

Is there any reason why non-woven won't take over the old paper completely? Look at the videos below:

 

 

Why would anyone still buy the old product over time?

 

 

I would actually not mind if Chad held on to this one, I believe the moat is more than decent as long as they keep most of the market share. Very predictable cash flow, margins of almost 25% now, niche market that is still growing double digits for some years, ... What's not to like?

 

Current capacity is almost 60K tonnes/year for Dresden. They now hold 50-60% of the market? Total possible capacity for non-woven could be 300K tonnes in x years. What if FTP could "corner" the market with the best product and highest capacity, giving it the best production cost and product. I guess that would keep competitors out over the long term because 1) there is no capacity for another big producer because of limited demand, 2) their costs would be higher and product weaker. Am I oversimplifying things?

 

Does anyone know how fragmented the other producers are? There was talk about future construction or buying a second mill for non-woven with 50K tonnes production at the annual meeting. Not now but maybe later if demand is high enough. I have no experience with things like game theory, but if they could get the same results as in Dresden, wouldn't that result in an interesting situation with competitors at 20-30K tonnes/year at best?

 

If there is a way to make it economically unprofitable for competitors to try and steal market share over the long term, keep it! Selling this thing at 5xEBITDA would be nuts imo, let alone 3.5-4x! One can dream of owning a 'hidden champion'...  :)

 

Btw, lessthaniv, what are the problems you speak of? Liquidity?

[triedtestedand]

Got this (and attached graph) from the ccfgroup.com website tonite ...

 

 

Dissolving pulp import of China in 2011-May 2012

 

According to customs data, dissolving pulp import of China keeps climbing up to 162.322kt in May 2012, up 27.81% from the previous month and up 52.12% year on year.

[colinwalt]

Got this (and attached graph) from the ccfgroup.com website tonite ...

 

 

Dissolving pulp import of China in 2011-May 2012

 

According to customs data, dissolving pulp import of China keeps climbing up to 162.322kt in May 2012, up 27.81% from the previous month and up 52.12% year on year.

 

Thanks triedtestedand, very interesting, articles such as the one linked below have me worrying about the impact on DP consumption due to the general slowdown in China... these DP figures provide some re-assurance that the growth in the DP market is currently sustainable...

 

http://www.mastermariners.org.au/index.php/component/content/article/3-news-international/559-30-coal-vessels-float-off-chinas-coast

 

At least 30 Panamax or Capesize vessels are floating off China's coast because traders who bought them have been unable to resell them to end-users, two industry sources said at a conference in Indonesia, Platts reports.

 

...