The closing spiral, it seems, has begun–as of yesterday at 2 PM. We won’t really know what’s going on until tomorrow, Wednesday, morning and then we will likely only know half the story What we do know is that MRC/Marathon has recently entered into a direct negotiation with the debtor, Pacific Lumber Company and its corporate parent, Maxxam,
This was revealed in Judge Richard Schmidt’s court in Corpus Christi at the beginning of the afternoon session that was supposed to be PL’s last hurrah, a more or less rote presentation to court of their usual gang of expert witnesses who would prove to u hat all was well in the woods and there was a lot of timber left. It was the Company’s last stab at justifying the impossible—their plan for reorganization.
The objective for the McMarathon forces in this particular negotiation is control of Palco, the entity in this almost impenetrable corporate goulash that actually owns the mill, the town of Scotia and the cogeneration plant that produces electricity from wood waste. Anyone who has visited Scotia or driven on U.S. 101 along the site knows that this is not an unsubstantial piece of real estate.
The larger prize, though, the 210,000 acres of timberland, is not yet directly entrained in this negotiation though this new negotiation provides a stronger tidal pull in that direction. Scotia Pacific, the landowning component of the Hurwitz stew is still in the hands, for the most part, of the note holders. They’re owed $ 714 million by the Company if you don’t count the tens of millions of dollars in interest that has accrued since bankruptcy was filed a year ago January.
Yesterday morning’s session, almost forgotten in the wake of later developments, was a test for the note holders’ latest scheme to force up the price of the land. At the end of the last confirmation session, two weeks ago, Texas entrepreneur, Andy Beal, made a leap from his lowly position of only owning $270 million worth of notes to the enlarged status of potential Stalking Horse bidder. His $ 603 million bid offer for the land trumped its closest rival, McMarathon, by a whopping $ 100 million. But was it a real bid? Would Beal really run a timber company if no one would outbid him in an auction? Or was it a poker move, a bluff, by Beal, the high stakes Texas Hold’em devotee?
To defend the Beal plan as something other than a price-inflating chimera, the Indentured Trustee himself was called in. Chris Mathews represents the Bank of New York that is formally the trustee assigned to manage the note holders interests. Mathews was cross- examined aggressively by a succession of McMarathon lawyers with a brief additional grilling by a Solicitor for the unsecured creditors’ committee and one for the Bank of America.
Mathews’ assignment was almost as difficult as that of the PL legal team–defend the indefensible. If PL’s plan, based on vastly overvalued real estate, was “dead in the water” as the Judge had suggested, then the Beal plan should sink to the bottom of a sunless sea. It’s corporate front, Scotia Redwood Foundation, seems every bit as illusory as Maxxam’s empty Scotia Development LLC and its empty office in Corpus Christi. That ruse rationalized a legal venue thousands of miles distant from our own modest but very real Scotia where the forest resources had by some happy accident been permanently situated.
What was even more distressing than Mathew’s obviously calculated defense of the Beal Deal was the fact that the Beallies had come up with an Amended Term Sheet, a new statement of the range of terms that they were offering the various parties who had an interest. The allotment designated for paying off the unsecured creditors had dropped from 100%, around $ 14 million, in the first Term Sheet to a measly $ 1.4 million, These are mostly local folks, little guys.
The $ 1.4 million pittance had actually been the note holders original Scrooge-like commitment. Beal seems to have come to the frightening realization that the generous offer in the original Term Sheet made him the potential heir to millions of dollars of obligations of which he wanted no part. Word has it that once these other obligations were officially wiped off the books by the new Sheet, the Beallies might offer the creditors a little more than the10% on the dollar. The problem is that in the interim, the employees would face losing all their benefits—all of them.
There was a neat twist in the logic of jettisoning benefits. The Beal Deal, given the vast inexperience of its two (as in ‘2’, not even 3 or 4) current employees was to be made possible by hiring all the old PL staff and workers (except the top 4 or 5 top guys who are the walking dead right now, knowing they’ve been singled out for termination). How do the Beal team plan to deal with the workers? Sorry, no more benefits, no 401 K, no pension, no medical insurance, no sick leave or vacation pay. None of that costly stuff but we really want you guys to work for us because we can’t do it without you. This is why Marathon Attorney, the combative David Neier, stated at the conclusion of the morning session that this plan was “patently unconfirmable” It just doesn’t add up yet.
One other interesting moment came out of that session. MRC attorney, Brian Hail, discussed the “waterfall” of money that would come to the note holders when the auction was done and the deal had finally closed. But there were all the ‘beaks’ that would be dipping into this waterfall and getting wet before the cascade reached its final goal.
The list was long. A substantial industry has developed around the carcass of the old PL like scavengers with appetites that would make buzzards blanch: this bank– that bank, this lender, that service provider, financial advisors of many stripes, experts, experts to advise the experts, the Plan Agent (Pete Wilson putting away a tidy $125,000/month for doing something he knows nothing about), the Special Plan Agent, the assistant Plan Agent, the ranks of lawyers with their casual avarice, Mathews himself—the list goes on.
And here we sit in humble old Humboldt, all of us average people, working hard, happily settling for what the hotshots think of as chump change, to make a decent life in our place, for our kids, for the land. Who are all these birds dipping into a ‘waterfall’ of wealth whose headwaters as far as I can tell are here in our watersheds, our trees, our community. There is a valid place for responsible capital investment, an honorable profit to be had. This isn’t quite it. We have to be grateful though that the Judge grasps what’s at stake. One hopes.