Pratt Paper: Could be reused

Structural complexity became deeply unfashionable in 2008. Bank credit committees, facing renewed pressure from above, looked askance at less straightforward structures, and punished strange-looking transactions accordingly. But some deals do not seek such complexity, yet nonetheless have structural complexity thrust upon them.

Pratt Industries' $112 million financing for a new paper mill came to market in June 2008 sporting a complicated public-private ownership structure. It also lacked a traditional fixed-price engineering, procurement and construction project, and operated in a heavily cyclical market.

The financing supports the construction of a cardboard production facility with a 360,000 tonnes-per-year capacity at Shreveport, Louisiana. The plant relies entirely on recycled fibres, and could account for 35% of the region's available supply. It is the third such plant that Pratt has built, following a Georgia plant from 1995 and a New York plant from 1997.

The cardboard industry does not have a dedicated group of followers in the debt markets, and is prone to cyclicality. Pratt, an affiliate of privately-held Visy Industries of Australia, provides substantial support to the transaction, including supply and output contracts with another subsidiary sufficient to provide it with a floor for its utilised capacity.

Pratt is also extending a guarantee of completion on the plant, which is being built without a fixed-price engineering, procurement and construction contract. Pratt's management will supervise construction, with Weiland Davco as general contractor, and more than 50% of the components for the plant already have locked-in prices. The sponsor's experience, not to mention some letter-of-credit support, bolsters the corporate obligation.

More complex is the plant's ownership structure. The project benefits from related infrastructure improvements and tax abatements, designed to attract business to Shreveport, located at the head of navigation on the Red River Waterway in northwest Louisiana. To qualify for these incentives, the Caddo-Bossier Port Commission is the owner of the facility and issuer of the notes.

The port enters into separate ground and facility leases for the mill, with rent under the ground lease sufficient to contribute to debt service. The separate leases allow lenders to gain a security interest over the facility, but not over the land. Lenders also gain security over Pratt's equity in the lessee, and Pratt is providing a guarantee of the lessee's obligations. Pratt will also provide funding to meet any cash shortfall, and although this funding would be subordinate to senior debt, it would be repaid through a sweep of the project's cash.

So Pratt has provided a large amount of parental support to the project, and has also been responsible for developing local recycling services. The challenges of starting it up are twofold: it takes time to educate recyclers, and cardboard prices, which have slumped at the same time as the wider commodities markets, are low.

In the last six months of 2008, the price per tonne of cardboard slipped from $115 to $40. Pratt will need to make sure that the plant is much more efficient than its competitors but is at the same time using proven enough technology to satisfy lenders. Pratt has also been aggressive in its use of lighter grades of paper, and the basis weights that it will use at Shreveport are lighter than those at the two earlier plants, which necessitates small changes to the plant's specifications.

Pratt had mandated Bank of America to work on a private placement that resembled the way it financed the Conyers plant. But the plant's ownership structure, and the state of credit markets in late 2007 made such a straightforward financing difficult. So the two brought in GE Commercial Finance, which has closed paper and forest products in the past, to work on the financing.

GE is providing $65 million of the project's $112 million debt requirement, and has also snagged for itself an administrative agent role. Such a role is unusual for a private placement, still more so when the financing also has an indenture trustee, whose functions are limited to managing the bonds' delivery and authentication. The administrative agent has a few functions that might be more analogous to a bank's, including monitoring the project's compliance with its covenants and keeping an eye on construction. The trustee is required because the public body, as issuer, requires an independent trustee.

The financing lacks for obvious imitators, particularly in the short term. Recycling programmes are likely to come under pressure as states' budgets contract, and demand for cardboard is likely to be reduced alongside the consumer economy's contraction. While there are many port authorities that are looking to attract new employers, not all of them will have suitable sites for paper recycling.

Pratt, like many of 2008's sponsors, might have hoped for a cleaner non-recourse deal. But in the confused environment of last year, getting a deal away, particularly such a complex one as this, counts as a substantial achievement.

Pratt Paper (LA)
Status: Closed June 2008
Size: $150 million
Location: Shreveport, Louisiana
Description: 360,000 tonnes per year cardboard production facility
Sponsor: Pratt Industries
Debt: $112 million
Administrative agent: GE Corporate Lending
Indenture trustee: Deutsche Bank
Placement agent: Bank of America
Lenders' counsel: Chapman & Cutler
Noteholders' counsel: Allen & Overy
Sponsor legal counsel: McKenna Long & Aldridge
Independent engineer: Talo Analytic International
Market consultant: Talo Analytic International and Moore & Associates