S&P lowers PaperWorks corporate credit rating to B- from B, places all ratings on CreditWatch with negative implications on weaker-than-expected cash flow, sluggish demand for company's paperboard products

Sandy Yang

NEW YORK , February 6, 2012 (press release) – Standard & Poor's Ratings Services said today that it lowered its corporate credit rating on Philadelphia-based PaperWorks Industries Holding Corp. to 'B-' from 'B'. At the same time, we lowered the issue-level rating on the company's senior secured term loan to 'B-' (the same as the corporate credit rating) from 'B'. The recovery rating on the senior secured term loan is '3', indicating our expectation of meaningful recovery (50% to 70%) for investors in the event of a default. In addition, all ratings were placed on CreditWatch with negative implications.

The downgrade and CreditWatch listing reflect our revised assessment of PaperWorks' liquidity to "less than adequate" from "adequate" (as our criteria define the terms) as a result of the increased likelihood that the company may need to address compliance with its covenants in the near-term.

"We believe that sluggish demand for the company's paperboard products along with cost pressures contributed to weaker-than-expected cash flow and a deterioration in covenant cushion with the potential for a covenant breach," said Standard & Poor's credit analyst Tobias Crabtree.

Previously, our ratings incorporated that the company would be able to improve its cushion with regards to its covenants to 15% following its July 2011 refinancing transaction. Financial maintenance covenants include maximum leverage, minimum EBITDA, minimum fixed-charge coverage, and maximum capital expenditures covenants.

Private-equity owned PaperWorks operates within the highly competitive and fragmented paperboard folding carton market where it faces several significantly larger and diversified competitors.

In resolving the CreditWatch listing, Standard & Poor's expects to meet with PaperWorks' new management team, following the recent departure of its CEO and CFO, to discuss its plans to address potential covenant compliance issues and to review its near-term operating and financial strategies. Ratings could be lowered if our view of the company's liquidity were to be revised to "weak" from "less than adequate," such as in the case that the company was unable to obtain near-term covenant relief.

Standard & Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of credit ratings. With offices in 23 countries, Standard & Poor's is an important part of the world's financial infrastructure and has played a leading role for 150 years in providing investors with information and independent benchmarks for their investment and financial decisions. For more information, visit http://www.standardandpoors.com.

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