Due to an early delivery of logs to its parent company, Scotia Pacific Co. was able to avoid a $2.2 million shortfall and make its July 20 interest payment to noteholders - but the company's future ability to keep the notes current remains uncertain. The notes are the only publicly rated timber collateralized notes outstanding, and only one of two such deals to ever hit the market, according to Everett Rutan, an analyst at Moody's Investors Service.
Part of the reason timber as a collateral hasn't caught hold is evidenced in ScoPac's own problems. Because of the cyclical nature of the timber harvest and a changing regulatory landscape, the asset type is not optimal to provide reliable cash flows. The troubled ScoPac, a subsidiary of logging company The Pacific Lumber Co., would not comment on its restructuring plans. The company has been working with UBS Securities to restructure the remaining $743 million of timber-collateralized notes, but would not comment on specific restructuring conversations other than to confirm their existence.
ScoPac laid out in an 8K filed with the Securities & Exchange Commission July 18 several courses of action it may pursue in light of its anticipated cash shortfall from diminished logging activity.
"To the extent that [ScoPac] is unable to achieve a negotiated restructuring of its timber notes consistent with management's expectations as to future harvest levels and cash flows, [ScoPac] expects that it will be forced to take extraordinary actions, which may include: reducing expenditures by laying off employees and shutting down various operations; seeking other sources of liquidity, such as from asset sales; and seeking protection by filing under the bankruptcy code."
Speculation is that the company - which will be cushioned by cash from this year's harvest - will be able to make its upcoming interest payment in January. Problems are more likely to arise again next July, when harvest levels will have dwindled over the winter, Rutan added.
Rutan said Moody's receives one or two inquiries a year by issuers looking into timber collateralized deals, but the price volatility and variable harvesting volumes can tend to stifle interest.
"Usually those assets are held by a pension fund, endowment, or family trust with a long investment horizon, say 50 years" Rutan said, "It is not like buying stock in Microsoft [Corp.]. The timber property may be a good long-term investment, but it's not particularly liquid. It can be hard to determine the precise value or to sell the property quickly." It is unclear, according to Rutan, whether the deals will ever take off in the U.S., largely because of ongoing regulatory concerns surrounding the timber industry.
But the company has long butted heads with California's State Water Resources Control Board, which is not pleased with the harvesting practices of ScoPac. Since the company, and its parent PALCO, were acquired by MAXXAM Inc., it has become highly leveraged, prompting it to strip the land of timber at unsustainable rates for quick cash, according to a report commissioned by the state. Its alleged reckless logging practices axed its right to log two watersheds - equating to roughly one-third of the company's harvest limit, according to Standard & Poor's - when the board met June 16.
In an April 6 filing ScoPac announced that UBS will assist as financial advisor in the restructuring of the outstanding timber notes. UBS was not available for comment. S&P the following day lowered ratings on the notes, to triple-C minus for all three of the series B classes, consisting of the $36.6 million, 6.55% A1 tranche maturing January 2007; $243.2 million, 7.11% A-2 tranche maturing January 2014; and $463.3 million, 7.71% A3 tranche maturing January 2014. Moody's followed suit April 21 lowering the A1 tranche to Ba3; A2 to B1; and A3 to B1.
ScoPac, set up to harvest timber in order to make payments on the notes, is structured as a bankruptcy-remote entity, with its principal assets consisting of timber property and the database it uses to manage it.
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