MERC

Business Context and Reporting Period

Company: Mercer International Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: May 25, 2006
Subject: Entry into a Material Definitive Agreement regarding a new credit facility for the Celgar pulp mill subsidiary, Zellstoff Celgar Limited Partnership (ZCL).

Key Financial Metrics and Facility Terms

This filing details a new financing arrangement rather than reporting operational financial results (revenue, profit, or cash flow). Key metrics regarding the new facility include:

• Facility Amount: Maximum of CDN $40,000,000 (replacing a previous USD $30,000,000 facility).
• Lender/Agent: CIT Business Credit Canada Inc.
• Maturity Date: May 25, 2009 (extendable for successive one-year periods).
• Currency: Advances available in both U.S. and Canadian dollars.
• Interest Rates:
  • Canadian Variable: CIBC Prime + 0.50%.
  • Canadian Fixed: Banker's Acceptances average + 2.25%.
  • U.S. Variable: CIBC U.S. Base Rate + 0.50%.
  • U.S. Fixed: LIBOR + 2.25%.
• Collateral: Secured by ZCL's working capital (inventory, accounts receivable, and related intangible assets) and guaranteed by Mercer International Inc.

Material Changes Versus Prior Period

The primary material change is the replacement of the former U.S. $30,000,000 revolving credit facility with the Royal Bank of Canada (RBC Facility) with the new CDN $40,000,000 facility with CIT Business Credit Canada Inc. An initial advance under the new facility was utilized to repay amounts outstanding under the RBC Facility.

Guidance, Outlook, and Covenants

Facility Purpose: Working capital and general corporate purposes.
Borrowing Base Restrictions: Maximum availability is subject to a borrowing base calculation:

• 85% of eligible accounts receivable (90% if insured).
• 65% to 85% of eligible inventory value (depending on valuation method).
• Mandatory prepayments are required if outstanding exposure exceeds the borrowing base.

Covenants: The agreement includes standard positive and negative covenants restricting further indebtedness, liens, fundamental changes, investments, restricted payments, affiliate transactions, and capital expenditures beyond budgeted limits.

Important Facts for Investor Verification

• Verify the current utilization of the new CDN $40,000,000 facility against the borrowing base limits.
• Confirm the impact of the currency shift from a USD-denominated facility to a mixed USD/CAD facility on the company's foreign exchange exposure.
• Review the specific capital expenditure budget limits imposed by the new covenants to assess operational flexibility.
• Monitor the interest rate spread (Prime/Base + 0.50% or LIBOR/BA + 2.25%) relative to market rates for similar secured lending.