S&P assigns IP's proposed 10-year, 30-year senior unsecured notes its BBB issue-level rating, citing company's satisfactory business risk profile

Kendall Sinclair

NEW YORK , November 8, 2011 (press release) – Standard & Poor's Ratings Services said today that it assigned its 'BBB' issue-level rating (same as the corporate credit rating) to Memphis, Tenn.-based International Paper Co.'s (IP) proposed 10-year and 30-year senior unsecured notes.

The notes will be structurally subordinated to all indebtedness and other obligations of IP's subsidiaries, including, following the closing of the Temple-Inland acquisition, indebtedness of Temple-Inland that will remain outstanding.

Net proceeds from the proposed notes, together with borrowings under IP's senior five-year term loan facility and available cash, are to be used to pay for the acquisition of Temple-Inland Inc., fund the repayment of certain of Temple-Inland's existing credit facilities, and pay fees and expenses in connection with the acquisition. If the acquisition is not consummated on or prior to June 30, 2012, or if the merger agreement in connection with the acquisition is terminated at any time on or prior to such date, IP will use the net proceeds from this offering, together with available cash, to redeem the notes.

The 'BBB' rating and stable outlook on IP reflects our view of the company's satisfactory business risk profile and its intermediate financial risk profile. The ratings also incorporate the company's entry into a definitive merger agreement to acquire Temple-Inland Inc. (BBB/Stable/--). Based on our assessment of both companies' satisfactory business risk profiles, and IP's plan to finance the merger using a combination of $1.5 billion of cash on hand and $2.2 billion of new debt, we believe the proposed transaction, if consummated, would be consistent with the current rating on IP. For the rating, we expect leverage of approximately 3x and funds from operations (FFO) to debt greater than 25%, or levels consistent with its intermediate financial risk profile. We expect that the combined entity's good cash flow generation could result in repayment of the acquisition debt and credit measures consistent with the ratings within the next one to two years.

On Sept. 6, 2011, IP signed an agreement and plan of merger with Temple-Inland. Pursuant to the merger agreement, each holder of Temple-Inland's outstanding common stock is entitled to receive $32 per share in cash, for total consideration of approximately $3.7 billion. IP also expects to assume approximately $600 million in Temple-Inland's existing debt. The proposed transaction is subject to regulatory and shareholder approval, which we expect to be completed in the first quarter of 2012. The proposed transaction provides an estimated $300 million of annual run-rate synergies, which the company anticipates it will achieve within 24 months of close. The company expects this amount to be accretive to earnings within the first year. In addition, we expect IP to benefit from Temple-Inland's competitive cost positions in corrugated packaging and building products. We also expect it to benefit from above-average forward integration. Following the completed merger, the combined entity would have an estimated 37% share of North American containerboard capacity. For the complete corporate credit rating rationale, see our summary analysis on IP published Sept. 29, 2011.

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