Appleton VP satisfied although notes priced wide of talk

By Paul A. Harris

St. Louis, Mo., Dec. 14 - The week of Dec. 10 saw the high yield primary market back up, according to a number of sell-side officials who spoke to Prospect News throughout the week. Five of the week's deals had either widened their price talk during execution, or had actually priced wide of talk: Appleton Papers Inc., Mandalay Resort Group, United Surgical Partners Holdings, Inc., Unisys Corp. and Pegasus Satellite Communications, Inc.

The first of these deals to price was Appleton.

Dale Parker, Appleton Papers vice president of finance, recently told Prospect News that although the company's $250 million senior subordinate notes due Dec. 15, 2008 (B3/B+) priced to yield 12½% - well wide of what a syndicate official said was the 10 7/8% to 11 1/8% talk - Appleton is pleased to have the deal done.

"We believed it was going to be around 11 1/8% originally," Parker said. "I think the market took a look at it and believed that maybe the coupon ought to be a little higher.

"I don't know if there's some effect of the 9/11 event in here or not," he added. "We're pleased to get 12½%, and we're happy to have this transaction behind us."

Parker told Prospect News that investors may not have gotten comfortable with the company's take on the rate of decline for its principle product, carbonless paper, even though, he said, the company attempted to price that rate of decline into the deal.

"The carbonless paper business has been declining for some years, and one of the issues that all lenders have to get comfortable with - and obviously our banks have - is at what decline rate carbonless paper will decline," he said.

"I don't know what the bond purchasers finally put in their models. We certainly believe the number is 8% or 9% a year. And that's the single-largest item that they have to get comfortable with. Obviously we're comfortable with it because we've spent our lives doing that, and we've got a lot of studies and a lot of history behind us because the market's been declining since 1994.

"I guess maybe they felt that the decline rate might be slightly higher than we projected. I just don't know."

To reassure investors, the Appleton notes came with a cash-flow sweep mandate, stipulating that the certain of the company's free cash would be used to pay down debt.

"We understand at this company very clearly that we're in a de-leveraging situation," Parker said, commenting on the sweep provision. "We've incurred this debt with one idea, and that it to pay it down as quickly as possible.

"We believe we're going to pay this bank debt down in roughly three or four years. When that debt is paid down the bondholders have the option, through a calculation of the cash sweep, which is basically EBIDTA, less any cash, taxes, or working capital that's expended in capital expenditures.

"This excess cash flow calculation generates a number," he added. "And the bondholders are allowed, if they wish, to have their bonds paid down at 103 after this calculation is made. It's totally their option.

"We want that to happen," Parker added, "because we want to pay these bonds down faster rather than later."

Proceeds from the new Appleton notes will be used to refinance part of the bank funding for the reecent management buyout of the company from U.K.-based Arjo Wiggins Appleton. Citing the terrorist attacks of Sept. 11, Parker said that the company decided to push forward with the transaction during the week of Dec. 10 because of uncertainty as to how world events might impact the markets going forward.

"We wondered what would happen if there was another 9/11 event," he said.

End

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