Court approves Wellman's modified reorganization plan; sponsors include BlackRock, Sola

By Rebecca Melvin

New York, Jan. 12 - Wellman Inc.'s third amended joint plan of reorganization, as modified, was approved Monday by the U.S. Bankruptcy Court for the Southern District of New York.

Three limited objections to the plan by suppliers including Dow Chemical were resolved via plan language adjustments, Wellman counsel, Jonathan Henes of Kirkland & Ellis, said.

Under the plan, first-lien holders will recover in excess of 30% of their claim, and second lien holders will recover in excess of 10%, which is better for the lenders compared to the original third modified plan filed in November, Brandon Aebersold of Lazard Freres' restructuring group told the court. Lazard has been Wellman's investment banker.

"The lenders are getting 50% of the equity of the new company. The first-term lenders are getting 60% of the 50%, or 30%; and the second-lien lenders are getting 40% of 50%, or 20%" he said.

The company is expected to emerge from bankruptcy by Jan. 31, and when it does its capital structure will be significantly stronger than prepetition, Aebersold said.

It will exit with $60 million in new financing, including $25 million in an exit financing facility and $35 million from plan sponsors BlackRock Financial Management Ltd. and Sola Ltd., which are committing $17.5 million each.

There will also be two issues of convertible notes, including $40 million of second lien convertible notes carrying a coupon of 10%, and $60 million of third lien convertible notes, which will be shared by the first and second lien holders, accounting for 50% of the equity of the reorganized company.

The second lien convertible notes will be convertible into stock on an initial basis of 4.6153 shares per $1,000 of principal amount of notes, while the third lien indebtedness will be convertible into stock on an initial basis of 3.0769 per $1,000 of notes.

When the Fort Mill, S.C., polyester-products manufacturer entered bankruptcy in February 2008, it had a $225 million revolver, of which $125 million to $150 million was drawn; first lien debt of $185 million; and second lien debt of $265 million.

Annual interest expense post-petition is expected to be about $9.5 million, assuming that only $25 million of the $35 million of exit financing is drawn, and assuming there is cash pay on the convertible coupons, and not PIK, or payment in kind, allowed under the indentures, Aebersold said.

If PIK is used, then interest expense drops to $6.5 million, Aebersold said.

"There should be significant cash, and the company will be less than three times levered," he said.

Lower oil prices eases exit

The company had EBITDA of $23.4 million for 2008, which was much higher than the $16 million originally estimated. The reason for the better result was that lower petroleum prices since October brought down the costs of its petroleum-based raw materials.

Projected 2009 adjusted EBITDA stands at $41 million. Adjusting to free cash flow - to show the plan is feasible - would require additional expense lines, including capital expenditures of $3 million to $4.5 million, depending on whether Wellman elects to expand a line; the interest expense; and taxes, for a total of $14.5 million to $19 million. But that still leaves positive cash flow in 2009 and going forward.

Package is superior to original third amended

This is superior to what the first lien holders would have received under November's original third amended plan, which included a $90 million rights offering, Aebersold said.

First-lien holders under the original third amended plan would have recovered under 30%, and under a liquidation scenario, which was included in the disclosure statement for the third amended plan, the holders would have recovered $29.9 million, or just 16.7%.

Second lien holders will have about a 9% recovery in the third plan, which is better than the recovery under liquidation, which would have been $14.4 million, or 5.5%.

Testifying under oath, Aebersold said he had been intimately involved in the Wellman case, including negotiating the debtor-in-possession financing with Deutsche Bank Securities, working on a business plan, negotiating with raw materials vendors, and working on the three filed plans including the current third modified plan

The enterprise value of Wellman upon exit will stand at $170 million, or $195 million minus the $25 million of drawn exit facility debt. But the equity value of Wellman is $206 million, Aebersold said.

Reserve for severance

Judge Stuart Bernstein confirmed the plan subject to a couple of language changes including the wording of releases for company directors and officers, and subject to the reserve of funds to pay severance to employees under a severance program that was changed during the plan process.

"Wellman employees were induced to remain at jobs and not seek other employment to continue to preserve the value of the estate," said Michael Bermish, a former employee, who represented himself.

"We were depending on severance packages to see us through to the next job," he said.

At the conclusion of the hearing, Bernstein told Wellman to reserve the amount that Bermish was seeking, plus additional reserve for other employees' severance.

Wellman, a Fort Mill, S.C., polyester products manufacturer, filed for bankruptcy on Feb. 22. Its Chapter 11 case number is 08-10595.

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