PaperWorks, backed by Sun Capital, weighed down by leverage: Moody’s

  • Moody’s cuts Sun Capital’s PaperWorks to Caa1
  • Cites leverage level, scale, concentrated product line
  • Weak packaged-food demand hurts packaging prices

Moody’s Investors Service pared the credit rating of Sun Capital-backed PaperWorks Industries, citing the food-packaging producer’s weighty leverage, relatively small scale and concentrated product line.

The credit-rating firm cut the corporate family rating of the Bala Cynwyd, Pennsylvania, company to Caa1 from B3. And it downgraded the probability-of-default rating to Caa1-PD from B3-PD.

The ratings outlook is negative, Moody’s analyst Anastasija Johnson wrote in a Feb. 17 report. About $360 million of debt is affected by the move.

PaperWorks and Sun Capital declined comment.

“Weak demand for packaged food” has reduced backlogs of and hurt selling prices for the company’s key product, coated recycled board, the analyst wrote. At the same time, the price of the raw material for the coated board has risen, Johnson wrote.

Its competitors are more integrated and diversified, which leaves PaperWorks “more exposed” to demand and weaker prices for coated recycled board, she wrote.

The company sold a business in December, bringing in $68 million. And in April it plans to close a Philadelphia mill, which will widen profit margins and help balance supply and demand industrywide in North America, the analyst wrote.

But adjusted for the sale of the business and the closure of the mill, Moody’s estimated PaperWorks’ leverage at 7x EBITDA in the year ended December 2016 “and we do not expect significant improvement in 2017,” Johnson said.

The ratings could be cut further if the company’s financial performance weakens as the mill is shut down and if the market deteriorates. A rating cut might also be prompted if PaperWorks’ free cash flow stays negative and if the debt-to-EBITDA multiple stays above 7 on a sustained basis, Moody’s said.

An upgrade would require the company to reduce the leverage multiple below 6, keep EBITDA profit margins above 9% and sustain positive free-cash-flow generation, Johnson wrote.

PaperWorks, backed by Sun Capital since 2008, posted $620 million of revenue for the year ended September 2016. The pro forma figure is $480 million reflecting the sale of the sheeting business.

Action Item: Read the Moody’s report here:

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