ConnectingCalifornia.org

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More Details of Pacific Lumber Deal:

Marathon-Mendocino plan confirmed

by John Blakeley
Jun-9-2008

http://www.thedeal.com/servlet/ContentServer?cid=1212755507222&pagename=TheDeal%2FNWStArticle&c=TDDArticle

After weeks of contested confirmation hearings in the Pacific Lumber Co. bankruptcy, a Texas judge has confirmed a reorganization plan led by hedge fund Marathon Structured Finance Fund LP.

Marathon and Mendocino Redwood Co. LLC, a lumber distributor owned by Gap Inc. founder Donald Fisher, will pay at least $580 million cash for the 210,000 acres of timberlands owned by Palco affiliate Scotia Pacific Co. LLC

Judge Richard Schmidt of the U.S. Bankruptcy Court for the Southern District of Texas in Corpus Christi confirmed the plan in a Friday, June 6, order, cramming down objections from the only other plan proponent remaining in the case, Bank of New York Trust Co. NA.

In a 119-page opinion, Schmidt estimated the timberlands, Palco's main asset, to be worth no more than $510 million.

BNY, the indenture trustee for $713.8 million in notes issued by Scopac and secured by Palco's timberlands, must therefore be paid at least $510 million through Marathon's plan, according to Schmidt's order.

In its plan, BNY proposed selling Palco's timberlands and lumber mill through one or more bankruptcy auctions. Schmidt, however, seemed concerned about the plan's impact on the town of Scotia, Calif., which Palco owns, and neighboring communities.

"If confirmed, the mill would likely be shut down and liquidated, along with the town of Scotia and the debtors' remaining assets, resulting in a loss of jobs for the community and a way of life in the town of Scotia," Schmidt said in his opinion. "The noteholders were not required to propose a plan that reorganized the timberlands and the milling operations. It was no secret, however, that the citizens of California and the vast majority of creditors wanted a solution that preserves the operation of both Scopac and Palco debtors."

Under Marathon's plan, Mendocino, which operates more than 220,000 acres of timberlands in California's Mendocino and Sonoma counties, will take over Palco's commercial timberland and saw mill operations. In his opinion, Schmidt called Mendocino "an experienced, environmentally responsible operator with a proven track record."

Prepetition lender Marathon, which provided Palco a $75 million debtor-in-possession loan during the bankruptcy, will split the debtors into two reorganized corporations: one which would own and operate the 210,000 acres of timberlands and Palco's lumber mill, and one which would own the town of Scotia.

Marathon will pay Scopac's noteholders $510 million, and use at least $7.5 million of its investment to improve Palco's mill, according to the Chapter 11 plan. The New York hedge fund will also convert some $160 million in pre- and postpetition debt into equity.

Unsecured creditors will be paid through a litigation trust, for which Marathon is contributing $500,000. The official committee of unsecured creditors supported Marathon's plan.

Marathon's plan does not contemplate an exit financing facility, though Schmidt left room for approval of such a facility in his order should Marathon solicit postpetition financing.

Palco, which filed for Chapter 11 with Scopac and four other affiliates on Jan. 18, had filed its own plan.

Its plan also anticipated the sale of the redwoods, but Palco abandoned the plan in favor of Marathon's after Schmidt made it clear that it couldn't be confirmed over objections from several creditor classes.

Palco, which is a unit of Maxxam Inc., cited enhanced regulatory restrictions on its timber harvesting operations that cut into revenue when it filed for Chapter 11.