Troubled lumber company Scotia Pacific Company LLC is working with UBS Securities to restructure $734 million of timber-collateralized notes. Scotia, a subsidiary of Houston-based MAXXAM Group Inc. is widely anticipated to miss its $27 million coupon payment due July 20, and in a June 9, Securities & Exchange Commission filing announced that its noteholders hired law firm Bingham McCutchen LLP as counsel and investment bank Houlihan Lokey Howard & Zukin as financial advisor.

Whether the company can come up with the cash to make its coupon payment hinges on its ability to harvest timber from its northern California properties, which serve as collateral in the deal.

"Generally the cash flows on the deal are generated from the sale of timber on the property, but at the end of the day, the assets are the timberland," said Frank Trick, associate director at S&P. Trick said the state's upcoming water board meeting is "something we are well aware of, and something we have been watching."

But the company has 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 The Pacific Lumber Company, were acquired by Maxxam, 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 allegedly reckless logging practices are likely to cause the board to axe ScoPac's right to log two watersheds - equating to roughly one-third of the company's harvest limit, according to Standard & Poor's - when the board meets June 16. The move would erode the notes' value even further.

In an April 6 filing, Scotia 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 $44.588, 6.55% A1 tranche maturing Jan. 2007; $243.300, 7.11% A2 tranche maturing Jan. 2014; and $463.348, 7.71% A3 tranche maturing Jan. 2014. Moody's Investors Service followed suit April 21, lowering the A1 tranche to Ba3'; A2 notes to B1'; and A3 paper to B1'. As of last Thursday the notes had an ask price of $0.64, $0.69 and $0.67, on the dollar, respectively.

Scotia, 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.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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