This week, we look north to Canada where a paper and pulp manufacturer has recorded a banner year for 2015. Catalyst Paper manufactures high-quality coated and uncoated printing papers, as well as pulp. After a reorganization in 2012, the company has steadily worked its way back to being a competitive presence in the paper industry. Its breakout achievement came early in 2015, with the acquisition of two U.S paper mills, one in Maine and one in Wisconsin. Not only did this acquisition increase production by 65%, it increased sales revenues by 78% YTD as of September 30, 2015 over the same period in 2014. For its most recent reported quarterly results (for the quarter ended September 30, 2015), Catalyst had already exceeded its total 2014 adjusted EBITDA (before specific items) by 35%. These notes have an excellent coupon yield of 11%, but are currently marked at a sizeable discount, indicating an outstanding 33.8% yield to maturity. Given Catalyst’s remarkable performance in 2015 and the astonishingly high yield on these bonds, we are targeting this thinly traded issue for addition to both our FX1 and FX2 very low cost, high yielding global income portfolios.
About the Issuer
Based in Richmond, British Columbia, Canada, Catalyst Paper is a North American manufacturer of printing papers, newsprint and pulp. Catalyst can trace its roots back to British Columbia Forest Products Limited which was founded in 1946. Its current global customer base includes retailers, publishers and commercial printers and manufacturers who require pulp. The company employs 2,800 people, with three mills in Canada, two mills in the United States, a distribution center in Surrey, British Columbia, and offices in both Richmond BC, and Dayton, Ohio.
According to the company’s 2014 annual report, Catalyst’s revenues were derived from the following sources: 55% from specialty printing papers (coated and uncoated), 21% from newsprint and 24% from pulp. For the nine months ending September 30 ,2015, these percentages had shifted as follows: 51.4% from coated papers, 19.3% from uncoated papers, 14.1% from pulp and 12.1% from newsprint.
In 2012, Catalyst undertook a debt restructuring process. With the cooperation of creditors, employees, operating communities and other stakeholders, the company emerged from creditor protection with significant debt and cost structure improvements, as well as a new board of directors. As part of the restructuring process, $250 million (USD) of these PIK toggle notes were issued to bondholders of the company’s first lien notes. (PIK toggles pay interest in cash at one rate or, at the company’s option, pay interest in additional PIK toggle notes. The interest paid in additional notes is set at a higher rate than the cash interest rate).
Catalyst Paper – Positioning for Growth
With its purchase of two U.S. based paper manufacturing plants (in Wisconsin and Maine), Catalyst has increased its production by 65%. Also, the addition of these two plants in the U.S. has meant the launch of the company’s new coated paper products. (Coated paper is used in applications such as high-end magazines, catalogs, brochures and retail inserts). As of May 2015, Catalyst became the sole manufacturer of the following coated products – Orion, Vision, Escanaba, Dependoweb, Capri and Consoweb brands. This suite of well-known coated products is recognized in the industry for their excellent quality and performance. For Catalyst, coated papers now command the lion’s share of the company’s revenues as well. For the nine months ended September 30, 2015, coated papers accounted for 51.4% of sales revenues, as opposed to 16.3% of revenues for the same period in 2014.
The projections for coated paper pricing also appear to favor Catalyst. A recent report by IBIS World projects the price of coated paper will continue growing at an average annual rate of 1.5%, fueled primarily by increasing demand in Asia, as well as rising consumer spending and industrial production of 3% and 4% per year, respectively, through 2018.
It also bears mentioning that with the recent weakness of the Canadian dollar against the U.S. dollar, Catalyst’s paper products now represent a quality product at a bargain price. The continued weakness in the CAD vs. USD means Catalyst’s products are cheaper than their U.S counterparts, which may help to increase sales.
2015 was definitely a turning point for Catalyst Paper with the addition of the two U.S. based mills that added significant production capabilities and an expanded product line. The company’s most recent reported quarterly results showcase a company that is blazing the path back to competiveness in an industry that continues adjusting to the effects of new technologies.
(Note: Unless otherwise noted, all figures are in Canadian dollars)
Here are some highlights from Q3 2015:
Adjusted EBITDA before specific items was $39.4 million compared to the previous quarters’ adjusted EBITDA before specific items of $9.7 million, an increase of over 3x.
Adjusted EBITDA margin (before specific items) surged to 7.3%, after registering a range of 2.1% to 3.3% in the previous five quarters.
Sales increased 18.4% over the previous quarter.
Sales revenues for the quarter increased 99.5% over Q3 2014, due primarily to the addition of the mills in Wisconsin and Maine.
Total liquidity as of September 30, 2015 was $86.2 million
Year-to-date results as of September 30, 2015 are also impressive. Sales have increased 78.5% due to additional coated paper and pulp sales, the positive impact of a weaker Canadian dollar and a change in product mix resulting from the addition of higher priced specialty grades. Catalyst also appears positioned for a record breaking year, with adjusted EBITDA before specific items totaling $65.1 million at the conclusion of Q3. This figure already surpasses 2014’s adjusted EBITDA before specific items of $48.1 million by 35%.
With Q3 operating income of $23.8 million and interest expense of $13.5 million, Catalyst had interest coverage of 1.76x. Adding back depreciation expense for the quarter (a non-cash item) of $15.0 million boosts the interest coverage to 2.87x.
While the financial ratios for Catalyst are not superb, we have found very few 30%+ yielding companies that are profitable with positive ratios. Catalyst has already undergone restructuring of the company in 2012, and has emerged with improved financial metrics and quality management.
The default risk is Catalyst Paper’s ability to perform. While we can all relate to the decline in daily newspaper circulation, the market for printed magazines continues to be stable, if not growing. An article from the Association of Magazine Media states “Moreover, overall print magazine circulation is stable to slightly up, and both print and digital magazine readership is increasing–while other traditional media are experiencing overall declines in audience or circulation.” The purchase of the two U.S. mills allowed Catalyst to expand its product line of its coated papers and in doing so, coated papers now make up 51% of the company’s revenues. The mills in Wisconsin and Maine have proved to be a strategic and definitely accretive addition to Catalyst’s existing operations.
Recently, the U.S. Department of Commerce imposed an 18.85% duty on Catalyst’s supercalendered paper product, saying the company received government subsidies. Catalyst is seeking an expedited review of the case in early 2016. The company has estimated that this ruling will affect approximately 4% of its total sales.
While Catalyst historically derived a large amount of its revenue from newsprint sales, the percentage of revenue from newsprint has continued to decrease year-over-year. YTD as of September 30, 2015, it made up just over 12% of total revenues. Newsprint has ceased to be part of Catalyst’s core business. This decline in newsprint revenues will most likely continue, but the company has added additional products, especially in its coated paper lines, that are performing very well.
This Yankee bond has very limited liquidity. For those investors who may be interested, it should be noted that these bonds may be much more difficult to obtain and sell on the open market.
These outstanding 35%+ yielding bonds have similar yields, durations, and risks to other issues reviewed on the Bond-Yields.com, such as the 40% Camposol S.A. and the 35% Data Group Convertible Debentures.
At Durig Capital, we provide investors with superb, professional service at a very low cost. In addition, we typically acquire bonds for our investors at a lower cost than many other service providers. We track and follow numerous bond issues for months, sometimes years, before targeting them for addition to client portfolios. We do not always publish our research on what we see as the most lucrative opportunities if the issues seems to be very thinly traded or more difficult to acquire for our clients. If you would like more information on this bond or any others that we have recently reviewed, please contact us to discuss how we can help you attain your portfolio goals.
Summary and Conclusion
Catalyst Paper had a breakout year in 2015. With the smart acquisition of two U.S. based mills, it not only significantly increased its production capabilities, it has also expanded its product line to include high-quality coated papers, which now make up over half of its product revenues. The company already exceeded its total adjusted EBITDA from 2014, without accounting for any fourth quarter results. The continued weakness in the Canadian dollar could also end up working in the company’s favor. The excellent 35% yield on these PIK Yankee bonds gives investors the opportunity to not only add diversification, but portfolio increasing yield. As such, we have marked these high-yielding bonds for addition to our FX1 and FX2 portfolios. If you would like to discuss how to add these bonds to your portfolio, please contact us.
Issuer: Catalyst Paper
Ratings: — /—
Yield to Maturity: ~34.87%
About Durig Capital
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Disclosure: Durig Capital and certain clients may have positions in Catalyst Paper 2017 bonds.
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