The good, the bad and the ugly: AbitibiBowater Inc.

Even without its crushing debt, Abitibi — and the entire forestry and newsprint industry — is going to have a hard time. But without debt relief, Abitibi will almost certainly be forced into bankruptcy.

AbitibiBowater Inc. (TSX: ABH) International producer of newsprint and other wood products
Established: 2007 (following merger of Abitibi-Consolidated and Bowater)
Employees: 20,000
Altman’s Z-Score: 0.39
Probability of bailout: low

How did it go bad?

The fate of the world’s largest newsprint producer will be decided over the next few months as AbitibiBowater Inc. attempts to sell off millions in non-core assets and renegotiate billions in debt. In order to avoid bankruptcy, it is going to have to convince lenders to swap debt for equity during a stock-market meltdown. As if that weren’t bad enough, demand for products is falling, and Abitibi is fighting to retain its listing on the New York Stock Exchange.

AbitibiBowater was created in October 2007 with the $1.7-billion merger of Montreal-based Abitibi-Consolidated Inc. and its former archrival, South Carolina–based Bowater Inc. One of the main drivers of the union was an attempt to control oversupply in the newsprint market. A surplus of product kept prices low and contributed to newsprint makers sitting out the recent commodity boom. And now the company’s primary customers — newspapers and the housing markets — are being particularly hard hit by the global slowdown. U.S. housing starts are off more than 56% from last year, cutting demand for Abitibi’s lumber products. Newsprint demand has slumped, as well, as North American newspapers struggle with declining circulation and advertising. Several U.S. newspaper companies — including Chicago-based Tribune Co., one of Abitibi’s biggest newsprint customers — have already filed for bankruptcy protection.

In an effort to reduce overcapacity, Abitibi has slashed annual newsprint production by about one million metric tons by closing plants in the U.S. and Canada. One of them was the 100-year-old Grand Falls mill in Newfoundland. As a result, Premier Danny Williams expropriated an estimated US$300 million worth of Abitibi timber and hydroelectric assets, claiming that since the company was no longer operating in the province, it had no claim on the assets. Abitibi is challenging the seizure and says Williams’ move is a violation of the North American Free Trade Agreement.

Abitibi owes about US$6 billion — more than US$1 billion of which comes due by the end of August. It laid out its position in stark terms. “We do not have funds sufficient to repay all such amounts when due and we may not be able to renew or extend these maturities,” the company noted in its latest SEC filing in early February. “If we are unable to refinance or restructure these obligations on or before their maturities, we would be in default.”

How ugly is it?

Even without its crushing debt, Abitibi — and the entire forestry and newsprint industry — is going to have a hard time. But without debt relief, Abitibi will almost certainly be forced into bankruptcy. Last month, it announced investors holding 32% of US$1.8 billion in debt maturing over the next 12 years had agreed to slash that by nearly US$400 million in exchange for higher interest rates. Canada’s Fairfax Financial Holdings Ltd. agreed to buy US$80 million worth of the new notes, but analysts warn that the deal only gives a temporary reprieve.

Even if Abitibi manages to get debtholders to agree to the new notes, it still must deal with US$347 million in debt maturing this month and another US$754 million coming due over the next year — and then manage the downturn. That’s a tall order, says Paul Quinn, an analyst with RBC Capital Markets. “With the long list of must dos, we are having difficulty seeing AbitibiBowater as a ‘going concern’” he said in a recent note to clients. To pay down what it owes, the company hopes to get US$750 million from the sale of its timberland assets, a South Korean paper mill, and hydroelectric assets in Ontario. In February, it was reportedly close to a deal to sell its hydro assets to Toronto-based Brookfield Asset Management Inc. But nothing has been announced yet.

What if?

Bankruptcy would certainly give Abitibi the opportunity to refinance. However, it would also make it much more difficult to operate, says Gail Glazerman, an analyst with New York–based UBS Investment Research in a recent note. “[Filing for bankruptcy] would clearly not be ideal,” she says. “[Abitibi] could lose synergies and have less operating flexibility.”

But even if Abitibi staves off the wolves in the coming months, its troubles could very well have a negative impact on communities where it operates. Provincial and federal NDP representatives in northern Ontario are already warning that the sale of its hydro assets could put an end to agreements to provide low-cost power to local paper mills, and thus endanger the long-term viability of the plants. That’s not exactly good news for workers at the paper plants or for Abitibi’s embattled shareholders. However, if the plants were shuttered, it would be a quick and brutal way to cut capacity in the oversupplied newsprint market.