Tuesday, January 27, 2009

One leading economic indicator...

... has always been how well the packaging materials business is doing. The thinking on this economic indicator is that if goods are being sold, they will be packaged. If the cardboard container business is booming, that means factories are making stuff, packing it up, and shipping it out for people to buy.

So you can imagine my horror upon learning that the packaging materials business is in Bankruptcy!

AP
Smurfit-Stone seeks bankruptcy protection
Monday January 26, 5:08 pm ET
By Mike Obel, AP Manufacturing Writer
Smurfit-Stone Container files for Chapter 11 bankruptcy protection, looks to restructure debt

NEW YORK (AP) -- Smurfit-Stone Container Corp., the largest producer of cardboard box materials in North America, on Monday filed for Chapter 11 bankruptcy protection as it looks to restructure a heavy debt amid a global credit freeze.

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The Chicago-based company, which employs nearly 22,000 people working at about 150 facilities across North America and in Asia, said it filed for protection from creditor claims in the U.S. Bankruptcy Court in Wilmington, Del., while it develops a financial reorganization plan. Its Canadian units will file under the companies' Creditors Arrangement Act in the Ontario Superior Court of Justice, the company said.

Smurfit-Stone has been struggling to repay its debt, which at the end of the third quarter was $3.5 billion -- nearly half its yearly revenue of roughly $7.5 billion.

Chairman and Chief Executive Patrick J. Moore said in a statement that by restructuring its debt Smurfit-Stone would create a better capital structure.

"The acceleration of the unprecedented global economic recession has weakened demand for packaging, and the frozen credit markets have prevented an out-of-court refinancing of our capital structure," Moore said in a statement. "While this is not the outcome we anticipated, we are taking this action to become a more financially healthy company."

The company said it expects to continue operations during the bankruptcy process and has received commitments for up to $750 million in debtor-in-possession financing to fund continuing operations. Of that $750 million, some $350 million is new incremental financing, while the remainder represents replacement of existing credit.

Earlier this month, a report said Smurfit-Stone was actively exploring bankruptcy protection and had engaged a law firm and financial advisers with expertise in bankruptcy filings.

Analysts responded positively to the filing.

"The main thing is that this was an expected event and overall being a Chapter 11, instead of a Chapter 7 filing, it is good for the company and good for the industry longer term," said Longbow Research analyst Joshua Zaret.

"My initial reaction is (that the $750 million in financing) should be sufficient but it will depend on the depth and duration of this current downturn which has so far been extremely nasty."

The bankruptcy comes as U.S. economic news continues to worsen. The median home sales price plunged to $175,400 in December, down 15.3 percent from $207,000 a year ago, according to the National Association of Realtors. The decline is the largest year-over-year drop in records going back to 1968.

Within hours, Standard & Poor's responded by slashing the company's debt rating to the lowest possible level, "D," or default status.

S&P analyst Pamela Rice also has the recovery ratings on the company's senior secured debt at "2," which indicates "our expectations for substantial (70 percent to 90 percent) recovery." Rice has the company's senior unsecured debt at "6," which indicates "our expectations for negligible (0 percent to 15 percent) recovery."

Smurfit-Stone's legal adviser is Sidley Austin LLP and its financial adviser is Lazard.

Its shares fell 1.7 cents to end at 4.3 cents. They traded as high as $9.99 over the past year but could be worthless after the reorganization.

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