Loss looms for Cerberus on paper company

An Ohio paper manufacturer has filed for Chapter 11 bankruptcy four years after Cerberus purchased the company in a $2.3bn leveraged buyout.

Cerberus Capital Management portfolio company The NewPage Corporation has declared Chapter 11 bankruptcy, capping a tumultuous four year investment period that has seen the paper manufacturer’s debt swell to a reported $3 billion, according to press reports.

Cerberus invested $200 million of equity in the company in 2005, according to a source close to the firm.

The Ohio-based company has obtained up to $600 million of debtor-in-possession financing from a consortium led by JPMorgan as it undergoes its restructuring, NewPage said in a statement.

Cerberus declined to comment.

In 2005, Cerberus acquired the company through a $2.3 billion leveraged buyout. According to the source, the firm's original equity investment in the company was around $200 million. The remainder of the deal was financed by approximately $1.8 billion in high yield bonds and $300 million of equity. The firm sold approximately $300 million of the company's assets shortly after completing the deal.  

Two years later, the firm purchased the North American operations of paper products producer Stora Enso for $2.52 billion, merging the company with NewPage. Cerberus paid $1.5 billion in cash, $200 million in vendor notes and 19.9 percent or $370 million of shares in the new company, which assumed an additional $450 million of debt.  

NewPage is not Cerberus’s first billion dollar bust. The New York-based private equity firm famously led a group of investors in 2007’s $7.4 billion buyout of US automaker The Chrysler Group. That investment ended in bankruptcy court, with the firm forgiving a $500 million loan to the company in its sale to Fiat and United Auto Workers.

Cerberus has not been alone in its misfortune; several other private equity buyouts agreed prior to the market collapse of 2008 have also ended poorly. Terra Firma lost its entire £1.6 billion investment EMI earlier year when Citi took control of it through a debt-for-equity swap, with PwC acting as administrators in the restructuring. Last year, The Carlyle Group wrote off a $330 million investment in bankrupt Japanese mobile phone company Wilcom.

Cerberus’s most recent setback comes only months after the April launch of its fifth private equity fund, targeting $3.75 billion. The firm is also marketing its first senior debt fund, which is expected to raise around $750 million.