February 8th 2008

By Matt Wirz
Debtwire
February 8, 2008

Would-be buyers of Scotia Pacific's timberlands won't know until next month if the bankrupt company will actually hit the auction block, but one consortium in the mix is already fine tuning the details of its bid. Scientists working for three environmental groups in a Nature Conservancy-led alliance met yesterday to discuss the nuts and bolts of the easement they intend to place on most of the acreage post-purchase, said a Conservancy spokesperson.

The Conservancy alliance is one of three parties to send Scotia's noteholders indications of interest to purchase the acreage - one of the others is a large university endowment - according to a source involved in the bankruptcy. Bank of New York, the indenture trustee for the note holders, stated in the plan of reorganization it filed last week that those unofficial bids ranged USD 550m-USD 600m.

"If the plan goes through, we intend to bid," said the conservancy spokesperson, while confirming that the alliance's indication of interest did fall between USD 550m and USD 600m. "We have brought together the private capital and industry experience to do this deal and we are committed to it."

A midpoint bidding floor of USD 575m implies a minimum bond holder recovery of roughly 70% assuming pre-petition principal of USD 713m and two years of missed post-petition interest of USD 55m annually. Scotia's bonds traded in hailing distance of that baseline recovery, printing in round lots around 78 last week, down from the low 80s since December, according to TRACE.

Note holders hope that an auction will bring in more interested parties and bids well north of the initial indications, said the source involved. But in order for Scotia to hit the block, Texas Bankruptcy Court Judge Richard Schmidt must approve the noteholders' plan over a competing proposal from Marathon Capital and Mendocino Redwood Company (MRC) as well as a plan filed by the debtor.

As previously reported, Marathon sits atop the capital structure of Scotia's parent company Pacific Lumber (Palco) through its provision of USD 160m in pre- and post-petition loans. The hedge fund proposes to swap its claims for equity in a merged entity that would combine Scotia's acreage with Palco's mill and be operated by MRC.

Under the Marathon plan, note holders would recover USD 175m in cash - financed through USD 225m equity injection from Marathon and MRC - as well as a new USD 325m bond. Assuming the notes could be immediately monetized at par, implies a 60% recovery for bondholders.

Schmidt indicated in hearings last week that he would prefer that the debtor and its respective creditors negotiate a settlement ahead of a disclosure statement hearing scheduled for 28 February, said a source familiar with the matter. Marathon will engage in talks with the note holders' advisors this month, the source said.

However, the bid-ask between the two creditor plans remains wide. Even including Marathon's credit bid, the investment proposed in the fund's plan falls USD 165m short of the low range of purchase prices implied by the note holder plan.

One alternative might be for Marathon to bid on Palco's assets and for MRC to bid on the timberlands separately under the auction proposed by note holders, said the source involved.

As the disclosure hearing approaches, the Conservancy alliance will continue to work out the details of the easement it hopes to place on Scotia's acreage in Humboldt County. The group includes environmental causes, such as the Redwood Forest Foundation and Save the Redwoods, in addition to private sector investors; Conservation Forestry, Atlas Holdings and Bank of America.

While MRC, owned by Gap Inc founder Don Fisher, has a track record for environmentally conservative harvesting of timberland in Mendocino, the easement under consideration by the Conservancy alliance would go one step further. Easements place timber management restrictions on properties they impact in perpetuity. If the coalition acquires Scotia's territory, 12,000 acres containing old growth forests would become protected wildlife areas and the remaining 197,000 would be managed under the easement.

The Conservancy set a precedent for the transaction last year when it bought 161,000 acres of forestland in the Adirondack region of New York for USD 110m in June. Atlas Holdings also participated in that transaction.