Waterfall Lending: Logger Borrows to Stay Afloat

Bankrupt Pacific Lumber avoids a battle with current lenders, who would have been knocked off the repayment line had the company borrowed from a ne...
Stephen TaubJune 26, 2007

In dire need of funding, bankrupt Pacific Lumber Co. has hammered out a deal to borrow $75 million from one of its previous lenders—and avoided a potentially devastating conflict in the process, according to the Associated Press.

By borrowing from a pre-bankruptcy lender, the logging company avoided a battle with current lenders. If Pacific had borrowed from a new lender, its existing lenders would have plunged down the repayment waterfall.

After negotiating with a number of banks and hedge funds, Pacific Lumber chose to move forward with financing offered by Marathon Structured Finance Fund LP, according to AP. The Marathon financing avoids a “costly and time-consuming priming fight with the pre-petition lenders,” Steven Zelin, a Pacific Lumber financial adviser and managing director of Blackstone Advisory Services LP, reportedly said in court papers.

The U.S bankruptcy Court must now approve the financing. Under the arrangement, Marathon would provide the company with a $75 million bankruptcy loan on the condition that Pacific Lumber repays $40 million owed on a prebankruptcy revolving loan. Pacific Lumber also owes $84 million on a term loan from Marathon and Canpartners Investments IV LLC, which recently took over LaSalle Bank’s interest in the loan, according to the wire service.

Pacific Lumber stated that by next month it wouldn’t have enough cash to continue operating without the financing, according to the report. “The timber industry in general and the debtors’ operations specifically have become increasingly unpredictable and negatively impacted by substantial and expanding regulatory constraints, ongoing litigation challenges, additional legislative impacts, negative judicial decisions, weather patterns, and low lumber or log prices,” Pacific Lumber reportedly said in a bankruptcy filing.

The company is a subsidiary of Maxxam Inc., a conglomerate controlled by Charles Hurwitz, a financier and celebrated corporate raider who in the 1980s built his empire financed, in large part, by junk bonds underwritten by Michael Milken and Drexel Burnham Lambert.

Maxxam, however, is not under bankruptcy protection. Last week, Pacific Lumber filed a request to pay more than $3.4 million in bonuses to top officials and employees to retain them at the companies as they reorganize under Chapter 11 protection, according to a separate AP story.

Pacific Lumber’s incentive plan for six executives would award bonuses of between nine and 12 months’ extra pay if the company’s pretax loss doesn’t exceed $7.7 million, the AP reported. Bonuses of between 13.5 and 18 months’ pay would also be awarded if the company posts pretax earnings.

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