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

(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.

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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