Domtar bonds mostly exempt from change-of-control requirements in wake of Weyerhaeuser transaction

By Paul Deckelman

New York, Aug. 23 - Most of Domtar Inc.'s outstanding bonds are not subject to any kind of mandatory buy-back stipulations, a company spokesman said in the wake of the Canadian paper company's announcement Wednesday that it will acquire Weyerhaeuser Co.'s Fine Paper unit in a complex $3 billion-plus cash-and-stock transaction which will leave Weyerhaeuser's shareholders in control of a majority of the stock of the "New Domtar" which will be created by the deal.

A spokesman for Domtar, Francois Taschereau, told Prospect News that of the four series of outstanding bonds Domtar has out, "only one obligation" would be affected by the transaction.

And even that is likely to be a moot point anyway, since those bonds shot up to levels in Wednesday trading well above where the company would be required to buy them back.

Tascherau, of Edelman Public Relations, a Montreal-based corporate communications firm retained by Domtar to handle media inquiries connected with the Weyerhaeuser deal, said that only the company's $125 million of 9½% debentures due Aug. 1, 2016 would be affected by the transaction - and even than, only if the company's credit rating were to be lowered within 90 days of the closing of the transaction.

In that event, he said, the holders "could force a buyback with a premium of 1%" over the bonds' face value, or at a price of 101.

However, even if the company were forced to make such an offer, it is highly unlikely that any bondholders would take advantage of it - since those bonds were being quoted late Wednesday trading around 105 bid, well up from their pre-news levels at 99.

The 91/2s are the only one of Domtar's four issues which the company sold when its ratings were considered below investment grade by the major ratings agencies; junk bond indentures typically contain change-of-control covenants and other protective provisions, which are usually considered necessary to get a high-yield deal done.

Domtar's ratings were elevated to investment grade in early 2000, and stayed there until the spring of 2005, when the agencies returned the company to junk status. In the interim, the company sold $600 million of 7 7/8% notes due 2011 in October 2001, $350 million of 5 3/8% notes due 2013 in November 2003, and $400 million of 7 1/8% notes due 2015 a year ago. As originally investment grade instruments, the notes' indentures do not have the same kind of protective covenants that the 9½% indentures do.

Under the terms of the transaction as announced by the two companies, Weyerhaeuser shareholders will get a 55% ownership in the "New Domtar" company that will be formed by the union of the existing Domtar and the Weyerhaeuser fine papers unit, which produces paper used in copier machines, brochures, and books. Shareholders of the old Domtar will own 45% of the new company. Domtar will also pay Weyerhaeuser $1.35 billion in cash, which the company will borrow under new credit facilities.

That cash payment, plus the stock valued at the closing price of Domtar stock on Aug. 22, results in a total transaction value of $3.3 billion, before considering resulting synergies.

The transaction is expected to close in the first quarter of 2007, subject to review by antitrust agencies and securities regulators in the United States and Canada, the receipt of a favorable tax ruling from the U.S. Internal Revenue Service, Domtar shareholder approval and other customary closing conditions.

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