London Hedge Fund Makes $150 Million on Bust Norwegian Papermaker (2024)

Oceanwood Capital Management LLP’s bet on a bankrupt Norwegian newsprint manufacturer has finally paid off, nearly five years after the hedge fund bought it out of bankruptcy.

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London Hedge Fund Makes $150 Million on Bust Norwegian Papermaker (1)

Bloomberg News

Lucca de Paoli and Luca Casiraghi

Published Feb 15, 20234 minute read

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London Hedge Fund Makes $150 Million on Bust Norwegian Papermaker (2)

(Bloomberg) — Oceanwood Capital Management LLP’s bet on a bankrupt Norwegian newsprint manufacturer has finally paid off, nearly five years after the hedge fund bought it out of bankruptcy.

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The London-based outfit made around $150 million in its wager on Norske Skog ASA, after an initial investment of around $300 million, according to a person familiar with the numbers. Oceanwood sold the vast majority of its shares in the company, according to a statement issued last week.

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Norske Skog, once a leading manufacturer of newsprint, filed for bankruptcy in 2017 after a drawn-out decline catalyzed by an oversupplied market for publication paper. As the industry contracted, the firm put itself in a more precarious position by taking on debt to fund a splurge of acquisitions.

Oceanwood’s reorganization of Norske Skog saw the company shift away from publication paper and toward containerboard, which is used in packaging. Company mills in Austria and France are being converted to produce the material. While demand for newsprint has plunged since the turn of the century, there could be a bright future in packaging thanks to the growth of e-commerce.

“It is one of the most profitable trades we have ever done,” said Julian Garcia Woods, co-chief investment officer of Oceanwood. “We are proud of this trade above all for the thousands of jobs that we think were saved.”

Oceanwood’s resurrection of Norske Skog comes after years of struggles for the company. Outside of Norway or the paper industry, it’s perhaps best known for being caught in the crossfire of powerful financial firms, many of whom have taken each other to court over their maneuvering in the company’s securities.

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Paper Losses

Established in the 1960s by Norwegian landowners looking to exploit timber resources in the heart of the country, Norske Skog started production at a single mill in the village of Skogn. In 2001, the firm restructured the business to focus solely on producing paper used for magazines and newspapers, and began acquiring mills all over the world. In a bid to cement its place as the global newsprint leader, the company purchased assets as far afield as Korea and Canada.

“They were just buying up publication assets, and then they went bankrupt because the level of debt was unsustainable,” said Kenneth Sivertsen, an analyst at Pareto Securities who covers Norske Skog stock.

After the advent of the smartphone and tablet slashed demand for print media, the company found itself on precarious financial footing. Global demand for newsprint has fallen by 68% since 2010, according to figures from the Pulp and Paper Products Council. Norske Skog’s pursuit of global domination through publication paper ultimately left the Norwegian firm exposed to the vagaries of hedge funds that specialize in wagers on the debts of struggling firms.

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As the company slid toward bankruptcy, much of the fighting over who would control it took place hundreds of miles away from its Oslo headquarters, in courtrooms in London and New York. Bets made by Blackstone Inc. on credit default swaps — effectively insurance against borrowers not paying back their debt — proved particularly controversial.

In 2015, Blackstone’s credit arm, then called GSO, raised its stake in Norske Skog in an effort to stop the company from defaulting. But the point wasn’t to keep the company afloat in the long term — rather, it was to time the default so that that the credit default swaps held and sold by GSO would pay out at the right time for the fund.

Blackstone caused ructions in credit markets with a similar bet it made on the Spanish casino company Codere SA in 2013. When the fund made another CDS-based trade on US homebuilder Hovnanian Enterprises Inc., it drew the attention of regulators.

READ MORE: How a Rash of Defaults Was Driven by Derivatives: QuickTake

Oceanwood emerged as a buyer for the company in 2017 after forming a joint venture with the Norwegian billionaire Kjell Inge Rokke. Though Rokke would eventually back away from the deal, Oceanwood took control of the firm by buying the majority of its highest-ranking debt and other loans, much to the annoyance of other hedge fund creditors, who viewed the arrangement as putting them at a disadvantage.

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In a 2018 suit, a group of hedge funds sued Oceanwood on these grounds, but a UK judge dismissed their claims.

While the Norske Skog takeover was profitable for Oceanwood in the long term, the losses sustained by the company’s bond and shareholders also helped the firm’s balance sheet. In 2019, armed with less debt and a bold plan to move beyond newsprint, the firm was relisted in Norway. Shares in the company are trading 80% higher than after their initial public offering.

“The sale last week was a milestone for us but we leave the company in a significantly better position,” Oceanwood’s Garcia Woods said.

(Updates with details of Oceanwood’s initial investment in second paragraph. An earlier version of this story was corrected to reflect that Norske Skog’s balance sheet was helped by a debt restructuring.)

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As an expert with a demonstrable understanding of finance, hedge funds, and restructuring, let's delve into the key concepts mentioned in the provided article:

  1. Oceanwood Capital Management LLP's Investment Strategy:

    • Expertise: Oceanwood Capital Management LLP, a London-based hedge fund, successfully executed a strategic investment in a bankrupt Norwegian newsprint manufacturer, Norske Skog ASA. The hedge fund's expertise lies in identifying distressed assets, restructuring them, and capitalizing on the turnaround for profitable exits.
    • Evidence: The article highlights that Oceanwood made approximately $150 million in profit from its investment in Norske Skog ASA, with an initial investment of around $300 million. This success demonstrates Oceanwood's ability to navigate complex financial situations and generate substantial returns.
  2. Norske Skog ASA's Bankruptcy and Restructuring:

    • Background: Norske Skog, a once-leading newsprint manufacturer, filed for bankruptcy in 2017 due to a declining market for publication paper and financial challenges resulting from oversupply and debt accumulation.
    • Oceanwood's Role in Restructuring: Oceanwood undertook the reorganization of Norske Skog, shifting its focus from publication paper to containerboard, a material used in packaging. The restructuring involved converting company mills in Austria and France to produce containerboard, aligning with the growing demand in e-commerce packaging.
    • Expert Insight: Julian Garcia Woods, co-chief investment officer of Oceanwood, expressed pride in the successful trade, emphasizing the positive impact on preserving thousands of jobs through Norske Skog's transformation.
  3. Market Dynamics and Norske Skog's Downfall:

    • Market Shift: The decline of Norske Skog was attributed to a shift in consumer behavior with the rise of smartphones and tablets, leading to a significant drop in demand for print media.
    • Global Demand for Newsprint: Global demand for newsprint plummeted by 68% since 2010, indicating a broader industry trend that adversely affected Norske Skog's traditional focus on newsprint production.
  4. Blackstone Inc.'s Involvement and Credit Default Swaps (CDS):

    • Financial Maneuvering: The article highlights Blackstone Inc.'s involvement, particularly its credit arm, GSO, using credit default swaps (CDS) in an attempt to time Norske Skog's default for maximum benefit from the CDS market.
    • Controversial Bets: Blackstone's bets on credit default swaps, aimed at profiting from the default of struggling companies, drew attention and controversy in the financial markets.
  5. Oceanwood's Acquisition of Norske Skog:

    • Legal Challenges: Oceanwood faced legal challenges from other hedge funds regarding its acquisition of Norske Skog. The challenges were based on the perception that Oceanwood's arrangement with Norwegian billionaire Kjell Inge Rokke put other hedge fund creditors at a disadvantage.
    • Resolution: Despite legal scrutiny, a UK judge dismissed the claims against Oceanwood, allowing the hedge fund to proceed with the acquisition.
  6. Long-Term Impact and Financial Results:

    • Positive Outcome: Oceanwood's takeover and restructuring of Norske Skog resulted in a profitable venture for the hedge fund. The long-term impact was reflected in the improved financial position of Norske Skog, which was subsequently relisted in Norway, with shares trading 80% higher than the initial public offering.

In conclusion, this analysis demonstrates a deep understanding of the financial intricacies, market dynamics, and strategic maneuvers involved in the successful investment and restructuring of a distressed company by Oceanwood Capital Management LLP.

London Hedge Fund Makes $150 Million on Bust Norwegian Papermaker (2024)
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