May 1st 2008

By Peg Brickley
Daily Bankruptcy Review
May 1, 2008

Pacific Lumber Co. has reached a tentative deal to back a Chapter 11 exit plan proposed by hedge fund Marathon Asset Management and Mendocino Redwood Co. LLC, potentially ending an impasse that has delayed the company's exit from bankruptcy.

At a hearing in the U.S. Bankruptcy Court in Corpus Christi, Texas, Wednesday, a Pacific Lumber attorney said the logging company has decided not to support a rival Chapter 11 plan submitted by bondholders. "We believe the business people have reached enough of an agreement that the lawyers and the boards can now become involved," the attorney, Shelby Jordan, told U.S. Bankruptcy Judge Richard Schmidt.

Schmidt is presiding over hearings in which Marathon Management and Mendocino Redwood, a California logging operation, have sought to persuade him to favor their plan to extract Pacific Lumber from bankruptcy proceedings. Pacific Lumber filed for Chapter 11 protection in January 2007.

The company was not able to garner enough votes from creditors for its own Chapter 11 proposal. Jordan said it opted to "stand down" to await documentation on a revised Chapter 11 plan from Marathon and Mendocino. "The noteholders plan is not one that (Pacific Lumber) will support," he said.

Jordan said he was being "deliberately vague" about details, but the new Marathon and Mendocino plan will have backing from the unsecured creditors committee as well as the company.

The deal could tip the balance in favor of the Marathon-Mendocino Chapter 11 plan, which promises to pump in new money, keep the company in operation and preserve jobs.

By contrast, bondholders of Pacific Lumber subsidiary Scotia Pacific Co. want Schmidt to allow them to auction Scotia Pacific's 200,000 acres of timberlands, the collateral securing their notes.

Both camps have urged Schmidt to reject their rival's plan, but Schmidt has signaled during the confirmation hearing that he see problems with each one. Schmidt has questioned whether the Marathon- Mendocino plan should increase the proposed recovery for bondholders. As of Pacific Lumber's bankruptcy filing in January 2007, bondholders were owed $740 million in principal and interest on their secured notes. But the Marathon-Mendocino plan only pays them $175 million in cash plus $325 million in new notes.

Jordan said Wednesday that Pacific Lumber opted to strike a deal with Marathon and Mendocino after the bondholders said Tuesday "that they were going to cut off all existing employees benefits."

The company took that as a threat to pensions, sick pay and vacation pay for its employees and opened talks with Marathon, which has been funding the bankruptcy case, he said.

William Greendyke, an attorney for bondholders, said his group had been left out of the talks between Pacific Lumber and the Marathon-Mendocino plan advocates. Greendyke also said bondholders were re-thinking their plan to deal with employee pensions.

"So it's an ongoing process," the judge commented.