PaperlinX is said to be close to pulling off some asset sales to shore up its balance sheet, and it would want to be, as there is a risk of breaching debt covenants.
The fine paper merchant tried to raise $300 million in October - it was not a great month for capital raisings - and only managed to come away with $150 million from institutions.
Its debt to equity at June 2008 looked reasonable at around 53% (and will be helped by the capital raising) but it appears that equity could be overstated.
Once PaperlinX's jewel in the crown, Australian Paper is in the books at $1.1 billion but the company recently tried to sell the business for half that and was struggling.
And if adjustment is made for the step-up preference shares (which from a shareholder's perspective should be treated as debt) debt to equity could be restated at 78%.
Looking to the PaperlinX prospectus for the issue, it expects European asset sales would occur as planned with major assets currently in due diligence proceedings.
In the event though that the anticipated profit were not realised on the sale of the European properties in the first half of FY2009, it is likely that PaperlinX would breach its interest cover covenant for the year to December 2008.
So boss Tom Park and his troops, who find themselves effectively distressed sellers in a buyer's market, appear to be running out of time. Hopefully they can complete these assets sales by year end.
What terms are they offering to sell these properties? If they have to sell then lease back the properties on a high yield it would be an expensive way to go about it.
The company has recently completed its upgrade of its Maryvale pulp mill which should result in cost savings of $40 million to $50 million.
Like many other operators, however, Park et al face the challenge of the rest of the business going backwards. Will these cost savings get a chance to hit the bottom line?
At the company's recent presentation it was claimed that strategic initiatives have saved the company $81 million since 2005. During that time though EBIT has fallen from $180 million to $160 million in 2008.
It would seem that customers rather than shareholders are getting the benefit of the cost reductions.
And this year doesn't promise to be much better. Broker consensus is for EBIT of $195 million but that is reliant on the profit from asset sales.
The anticipated profit from the sale of these properties forms a significant proportion of PaperlinX's budgeted earnings for the first half of FY2009.
If things don't improve there will be another issue on the way next year.
mwest@fairfax.com.au
BusinessDay
