Pacific Lumber placed in Chapter 11

Maxxam Inc. placed its embattled Pacific Lumber Co. subsidiary into Chapter 11 bankruptcy to prevent bondholders from trying to foreclose on 200,000 acres of prime redwood forest in Northern California.

Maxxam also put Scotia Pacific Co. (known as Scopac), Britt Lumber Co. and three other affiliates of its forest products group into Chapter 11 Thursday in U.S. Bankruptcy Court in Corpus Christi, Texas. All the companies are controlled by Maxxam, a Houston-based conglomerate with assets of more than $1 billion. Maxxam is controlled by Texas tycoon Charles E. Hurwitz and also owned a controlling interest in Kaiser Aluminum Corp. before the metals maker went bankrupt and closed its big Mead smelter just north of Spokane several years ago.

Kaiser has since emerged from bankruptcy, is no longer affiliated with Hurwitz, and continues to run the Trentwood rolling mill in Spokane Valley.

Maxxam maintains financial interests in real estate development and horse racing. It did not file bankruptcy protection.

One of Maxxam’s lumber companies, Scopac, owes bondholders $714 million and said it wouldn’t be able to make a $27 million interest payment to bondholders due Saturday.

“Scopac currently has insufficient cash on hand” to pay the interest on its debts, said Gary L. Clark, chief financial officer of Scopac and Pacific Lumber, in court papers.

Failure to make the interest payment would have resulted in default and Scopac’s bonds are secured by 200,000 acres of timberlands located in Humboldt County, Calif.

“Scopac commenced this Chapter 11 case to avoid foreclosure,” and give the company time to restructure its debt, said Clark.

Weighed down by its heavy debt load and facing environmental lawsuits and regulatory restrictions over its logging operations in Northern California, Clark said Scopac is facing a cash shortfall for the foreseeable future.

“Without significant regulatory relief and accommodations, Scopac’s future timber harvest levels over at least the next several years and cash flows from operations will be substantially below the minimum levels necessary to meet its obligations,” said Clark.

Maxxam’s forest products group, which includes Pacific Lumber, Scopac and Britt, had assets of $421 million, or 40 percent of Maxxam’s total assets, according to the company’s 2005 annual report, the last year available.

But the timber companies have lost money for years. The group posted a 2005 pretax loss of $70 million on net sales of $182 million, compared with a $49 million loss on sales of $202 million for the same period in 2004.

In November, Maxxam said it bailed out Pacific Lumber, loaning the company an undisclosed amount of cash, so it could cure a default under its credit agreement.

The timber companies have also been involved in a long-running dispute with the state of California over a 1999 debt-for-nature swap, where the company traded 5,600 acres of old-growth redwood timberland to federal government in exchange for $300 million plus 7700 acres of forest and the right to log the land.

Last month, Pacific Lumber and Scopac sued California in state court for failing to live up to the part of the deal and, in effect, preventing the companies from remaining “economically viable,” court papers said.