S&P's lowers Solo Cup ratings to B- from B, removes ratings from CreditWatch on weak earnings trend in 2010, limited liquidity, concerns about company's ability to absorb raw material costs; outlook negative

Joyce Routson

Joyce Routson

Dec 3, 2010 – Standard & Poor's

NEW YORK , December 2, 2010 (press release) – Standard & Poor's Ratings Services said today that it lowered all its ratings on Solo Cup Co., including its corporate credit rating to 'B-' from 'B'. We removed the ratings from CreditWatch, where they had been placed with negative implications on Aug. 13, 2010. The outlook is negative.

"The downgrade was prompted by a weak earnings trend in 2010, negative free cash from operations, limited liquidity, as well as concerns about the company's ability to absorb additional raw material cost volatility," said Standard & Poor's credit analyst Liley Mehta.

The ratings on Solo Cup reflect the company's highly leveraged financial profile with less than adequate liquidity, negative free operating cash flow, and leverage of 7.5x (excluding debt-like convertible participating preferred stock) as of Sept. 26, 2010. This overshadows the company's market positions, as well as ongoing restructuring actions to improve the company's cost position. We characterize Solo's business risk profile as weak and its financial risk profile as highly leveraged.

With annual revenues of about $1.6 billion, Highland Park, Ill.-based Solo is one of the largest providers of disposable plastic, paper and foam cups, plates, cutlery and containers to food service distributors, quick-service restaurants, grocery stores, warehouse clubs, and retailers in the U.S.

The negative outlook reflects the potential for a lower rating if operating results and liquidity fail to improve from current levels. Given Solo's weak performance, extremely high debt leverage, and limited liquidity, there is little room for additional adverse developments. We could lower the rating if the company continues to generate negative free cash flow, reducing availability under the revolving credit facility to a level that could cause the springing covenant to come into effect.

We could revise the outlook to stable if the company successfully completes its restructuring actions, improves credit measures, and generates positive free cash flow from operations. This would improve the liquidity position and enable the company to maintain a comfortable cushion above its fixed charge covenant. In our scenario, a 5% revenue increase in 2011, coupled with a 2% improvement in margins from our expected 2010 levels, could result in FFO to total debt improving to appropriate levels of 10%.

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