Caraustar continuing to evaluate refinancing options for 7 3/8% notes due June 1, 2009

By Jennifer Lanning Drey

Portland, Ore., Aug. 1 - Caraustar Industries, Inc.'s top priority is pursuing and executing a refinancing strategy for the company's 7 3/8% senior notes due June 1, 2009, Caraustar executives said Friday during the company's second-quarter earnings conference call.

Caraustar is seeking to refinance the notes through a combination of asset sales and secured financing.

"We continue to make progress, and at this time we continue to be optimistic with regard to refinancing the senior notes," William A. Nix, Caraustar's chief accounting officer, said during the call.

In June, about $190 million of the senior notes were reclassified as a current liability on the company's balance sheet.

Caraustar chief executive officer Michael J. Keough said the company is pursuing parallel paths that it will present to its board of directors before taking its advice on which strategy to execute.

"Ten months is a lot closer than any of us would like, but it still gives us the opportunity to optimize the strategy for all of our stakeholders so we're not forced into trying to do something in a market that's unreceptive.

"As we pursue these parallel paths, we're positioning ourselves to respond if the markets change and to act decisively if they don't," he said.

Following the close of the second quarter, Caraustar took its first step toward dealing with the notes by raising a portion of the funds needed to refinance the debt through the sale of its 50% interest in Premier Boxboard LLC (PBL) for proceeds of $62 million.

After using $31 million of the proceeds to repay the entire $34 million balance of term loan and revolver debt under its senior credit facility, the company said it would apply the remaining portion to the note refinancing.

"Pursuing and effectively dealing with the 2009 senior note is first and foremost on our list and we're giving it a lot of thought, consideration and effort," Keough said.

Quarter-end cash down

Caraustar ended the second quarter with a cash balance of $80,000, down from $6.5 million at Dec. 31, 2007.

By July 31, the cash balance had increased to $35 million, primarily due to the PBL sale. Availability for general business purposes under the company's revolver was $42 million at the end of July.

Caraustar chief financial officer Ronald J. Domanico said the company will lose cash flow associated with its former membership in the PBL joint venture but expects to offset the losses over time through infrastructure reductions and margin improvements at its Sweetwater Paperboard mill in Georgia.

Caraustar also recently announced plans to close its Chattanooga Paperboard mill in Tennessee, which Domanico said is expected to result in $9 million of annual savings, $8.6 million of which will be cash savings that are projected to begin to improve EBITDA before the end of 2008.

Caraustar used $1.7 million of cash in operating activities for the six months ended June 30. The figure compares to a use of $12.2 million in the prior-year period, with change primarily due to improved operating results.

Basket to repurchase debt

In connection with the sale of its interest in the PBL joint venture, Caraustar amended its senior credit facility to provide a limited basket to repurchase debt. Under the conditions of the amendment, in order to repurchase debt, Caraustar must maintain average daily availability under the facility of at least $25 million for the 90 days prior to a prepayment.

After an initial 90-day period following the amendment, Caraustar's basket to repurchase debt will be $17 million before considering cash on hand, Nix said.

$3.6 million loss

For the second quarter, Caraustar reported a net loss from continuing operations of $3.6 million, compared to a 2007 second-quarter loss of $2.5 million.

During the quarter, the company faced headwinds, including high fiber costs along with increased energy and transportation expenses.

"Considering the challenging backdrop, Caraustar delivered a solid performance," Keough said.

Second-quarter sales from continuing operations were $217.0 million, down slightly from sales of $221.2 million in the same quarter in 2007.

Caraustar is an Austell, Ga.-based integrated manufacturer of 100% recycled paperboard and converted paperboard products.

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