S&P assigns Longview Fibre 'B+' corporate credit rating with stable outlook, 'B+' issue-level rating to its senior secured notes due 2016 with '4' recovery rating, reflecting expectations for higher selling prices, steady demand
May 9, 2011
– U.S.-based Longview Fibre Paper and Packaging Inc. intends to offer $450 million of senior secured notes due 2016 to fund a distribution to shareholders.
We have assigned a 'B+' corporate credit rating to Longview Fibre. In addition, we have assigned a 'B+' issue-level rating to its proposed senior secured notes due 2016.
The stable rating outlook reflects our belief that the company's operating performance during the next several quarters will benefit from higher overall selling prices and steady demand, resulting in credit measures that we would consider to be in-line with the rating given the company's weak business risk profile and aggressive financial risk profile.
Standard & Poor's Rating Services said today it assigned its 'B+' corporate credit rating to Longview, Wa.-based Longview Fibre Paper and Packaging Inc. The rating outlook is stable.
At the same time, we assigned a 'B+' issue-level rating (the same as the corporate credit rating) to the company's proposed senior secured notes due 2016. The recovery rating is '4', indicating our expectation of average (30% to 50%) recovery for lenders in the event of a payment default. These ratings are based on preliminary terms and conditions. (For the complete recovery analysis, see Standard & Poor's recovery report on Longview Fibre to be published on RatingsDirect shortly following this release.)
Proceeds from the proposed offering will be used to fund a distribution to shareholders. In addition, the company intends to amend its existing asset-based lending (ABL) facility prior to, or simultaneous with, the completion of the proposed offering. The ABL facility, which will not be rated, will provide availability up to $100.0 million, subject to a borrowing base limitation, for a period of 4.5 years.
"The 'B+' rating reflects what we consider to be Longview Fibre's aggressive financial risk profile and weak business risk profile," said Standard & Poor's credit analyst Tobias Crabtree. Our view of the company's aggressive financial risk profile is based on our belief that adjusted leverage is likely to be maintained at 4x or less and its liquidity profile to be adequate over the upcoming 12 to 18 months following the proposed offering and amendment to its ABL facility. In addition, our ratings incorporate the expectation that any potential acquisitions, growth initiatives, or additional shareholder distributions would be financed in a manner that doesn't negatively impact the company's financial risk profile. Our assessment of Longview Fibre's weak business risk profile incorporates the risk of operating a single paper mill complex, its modest product and geographic diversity, and its small size compared with more integrated containerboard and corrugated products manufacturers. Longview Fibre does not publicly disclose its financials.
We believe that the kraft papers, containerboard, and corrugated products industry fundamentals should remain favorable over the next several quarters, reflecting better pricing compared with the prior year's similar period and a steady increase in demand due to a gradual economic recovery in the U.S. As a result, we believe that Longview Fibre's full-year sales, which increased approximately 20% in the first quarter of 2011 compared with the prior year's first quarter, could meaningfully increase in 2011 from 2010. In addition, we expect that 2011 adjusted EBITDA will likely exceed its trailing-12-month level as of March 31, 2011, given the higher level of expected sales offset somewhat by rising input costs. We believe the company's recent improvement in profitability is sustainable given the ongoing benefits from prior cost reductions and productivity improvement initiatives, a more optimized product mix in kraft papers, and our expected continued increase in sales volumes. Still, a key risk to our EBITDA forecast is if a greater-than-expected increase in raw material costs, especially that of wood and recycled fiber, energy, and chemicals, is unable to be offset via price increases.
The stable rating outlook reflects our belief that the company's liquidity position will remain adequate and operating performance in the next several quarters will result in credit measures that we would consider to be in-line with the ratings given the company's weak business risk profile and aggressive financial risk profile. Specifically, we consider leverage below 5x to be acceptable for the 'B+' rating.
We could lower the rating if the operating environment were to worsen rather than improve, causing leverage to exceed 5x on a sustained basis, given the company's weak business profile. Specifically, based upon our expected debt levels following the proposed transaction, adjusted EBITDA would have to decline more than 20% from its trailing 12-month level as of March 31, 2011, for this to occur. We could also lower the ratings if the company adopted a more aggressive financial policy with regards to any potential acquisitions, growth initiatives, or additional shareholder distributions that would negatively impact the company's financial risk profile.
We consider a positive rating action unlikely in the intermediate term, given Longview Fibre's weak business risk profile. In addition, we would expect the company to use excess cash flow generation to fund growth initiatives, potential acquisitions, or additional shareholder distributions rather than to reduce debt.