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Update: Mendocino Redwood’s plain to rebuild Palco approved

By John Driscoll
The Times-Standard
June 6, 2008

A new Pacific Lumber Co. will be shaped by the Mendocino Redwood Co., according to a federal bankruptcy court’s ruling filed today. U.S. Bankruptcy Court Judge Richard Schmidt announced his decision to confirm Mendocino Redwood’s reorganization plan for the more than 140-year old timber company to attorneys in his Corpus Christi, Texas courtroom today. He also said he would not confirm a plan by bondholders to auction off the timberlands that secure their $714 million debt.

“The credible and persuasive evidence at the confirmation hearing establishes that the reorganized entities are reasonably expected to be stable, creditworthy, able to pay their debts as they mature, able to comply with all non-bankruptcy environmental laws with regard to the regulatory approvals of ownership and operation, and assume all environmental obligations,” Schmidt wrote in his ruling.

The judge did require some changes to the Mendocino plan filed jointly with Palco creditor Marathon Structured Finance Fund. Among them, Schmidt told attorneys that he wanted Mendocino to leave Palco’s litigation against the state over the Headwaters Forest deal with the bondholders.

Mendocino Redwood Chairman Sandy Dean said lawyers were going through the judge’s 119-page ruling to make sure they understand the changes.

“We’re very pleased that the judge ruled in favor of our plan,” Dean said.

In ruling against the bond holders’ plan, Schmidt said it was infeasible, and laden with conflicts of interest between the largest noteholder – billionaire investor Andy Beal’s Beal Bank – and the other noteholders. He also said the plan doesn’t provide enough certainty, or whether regulatory approval could be attained by the potential future buyer.

The decision comes after Palco’s 18 months in bankruptcy. Palco’s own plans to reorganize were withdrawn in recent months, plans which generated major controversy in Humboldt County. Palco and its parent company Maxxam Inc. then put their support behind Mendocino Redwood and Palco creditor Marathon Structured Finance Fund.

Mendocino’s plan looks to blend the timber and lumber operations of the company, while Marathon restructures the town of Scotia. Mendocino and Marathon will pay the noteholders $530 million in cash for the land.

The plan will reduce the company’s debt obligations by hundreds of millions of dollars. Trade creditors would get 75 percent of their claims. Mendocino said it would seek Forest Stewardship Council certification for the new operation, and invest $7.5 million into the Scotia mill to improve its flexibility.

Bond holders have 10 days to try to procure a stay against Schmidt’s decision, and if they cannot get a stay, it is possible that Mendocino Redwood could close on the deal shortly thereafter.

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