Portola Packaging Inc., one of the largest manufacturers of tamper-evident closures, plastic containers and related services for the dairy, juice and water industries, will enter into a restructuring support agreement through a prepackaged Chapter 11 bankruptcy filing.
The Batavia, Ill.-based company reached a deal with its principal lenders and holders the largest of which are General Electric Capital Corp. and Wayzata Investment Partners LLC in excess of 80 percent in the amount of its 8.25 percent senior notes due in 2012. Wayzata will provide the firm with access to a $10 million bridge facility to fund the restructuring, Portola said in a July 24 news release.
Under the restructuring expected to span from early September to late October holders of Portola senior notes will receive 100 percent common stock of the reorganized company in exchange for their claims. Wayzata is expected to be Portola's controlling shareholder upon its emergence from Chapter 11. According to the release, all obligations owed to trade creditors, suppliers, customers and employees are expected to be unimpaired and unaffected by the restructuring.
News of the pending Chapter 11 filing comes on the heels of several recent setbacks for Portola's financial image.
Standard & Poor's on July 23 lowered its rating on Portola from CCC to CCC-, with a continuing negative outlook. The downgrade reflected a potential debt restructuring that S&P said it could view as tantamount to a default, heightened liquidity concerns and continued poor operating results. On June 30, Portola received a notice of default and reservation of rights from GE Capital under the terms of its $60 million senior secured revolving credit facility, which GE said was prompted by Portola's recent statement that it was investigating accounting irregularities at two subsidiaries in China, Portola (Asia Pacific) Holding Ltd. and Shanghai Portola Packaging Co. Ltd.
The irregularities ``primarily consisted of errors in the accounts receivable, accounts payable, inventory and cost of sales accounts,'' and totaled about $2.5 million, according to a recent company news release.
The company's annual sales are about $284 million.
In a July 24 telephone interview, John LaBahn, Portola's senior vice resident and chief financial officer, said the Chinese audit was ``a factor, but not the deciding factor,'' in the decision to pursue a prepackaged bankruptcy.
LaBahn said high resin prices and energy costs had had a far larger impact on Portola's balance sheet than the accounting errors.
S&P analyst Henry Fukuchi said that resin and power costs, plus expenses associated with shipping, were driving Portola's recent underperformance.
``They are doping a lot of restructuring, but the results haven't been impressive in the short term,'' Fukuchi said July 24 by telephone.
``Liquidity is still a major concern. We're watching the outcome of negotiations between CE Capital and Wayzata over the credit revolver and the terms of the restructuring that they will seek and we'll have to play it week by week,'' Fukuchi said.
He did not rule out a possible sale of the company, but thinks it's unlikely.
``Right now, the day-to-day operations are unaffected [by the prepackaged bankruptcy]. A lot of benefits of restructuring will be realized in the last part of this year and the beginning of the next calendar year,'' Fukuchi said.
Portola reported preliminary net losses of $3.4 million on sales of $75.1 million for the third quarter of 2008, compared with a net loss of $1.3 million on $68.7 million in sales for the third quarter of 2007.
The decrease in profit was due to lower gross margins, higher human-resource-related costs, bad debt expenses and increased restructuring costs, according to the company.