Yesterday I noted how a government program is depressing the newsprint market. But wait, there’s more.
Abitibi-Bowater is the largest maker of newsprint in the world. They also happen to be in bankruptcy. In 2007 the two paper behemoths joined forces and dominated their industry. After a host of sales and spin-offs, slumping demand and weak prices left the company unable to service its debt. So it sought to negotiate swap with its lenders.
Here’s where it gets interesting. Negotiations are pretty standard when conditions change. Often the existing shareholders usually get diluted and the lenders control the company. Not a great situation, but avoiding court is usually faster and cheaper.
But not this time. Many lenders have purchased default protection on Abitibi. So someone else will make good on Abitibi’s debt if they have to file for bankruptcy. This makes some sense, but now the lenders have no incentive to keep them out of court. Shoot, it’s in their interest to give them a push, where the big winners are often the lawyers.
So we have a government program and credit derivatives combining to push an industry giant into bankruptcy. Can we just call for a do-over?
Douglas R. Tengdin, CFA
Chief Investment Officer
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