Fitch Ratings affirms, withdraws all of Solo Cup's ratings, due to business reasons
February 27, 2012
– Fitch Ratings has affirmed and withdrawn all ratings for Solo Cup Company (Solo Cup). Ratings include:
--IDR at 'B-'; --Senior secured Notes at 'BB-/RR1';
--Senior secured revolving credit facility at 'BB-/RR1';
--Senior subordinated notes at 'CCC'/RR5.
Fitch has withdrawn the aforementioned ratings for business reasons.
The rating affirmation is a result of a recent 8-K filing by the company. Solo Cup's board of directors has approved the payment of retention bonuses to key senior level management only in the event upon the completion of a transaction involving a change in control of the company occurring prior to June 1, 2012. The retention bonus could be paid upon the termination of the executive's employment. Consequently, Fitch believes this significantly increases the event risk related to a change in strategic direction. The secured notes and subordinated notes both contain a change of control covenant.
Potential outcomes could include Solo Cup being consolidated into a stronger packaging entity, which likely results in the acquiring company removing excess industry capacity. Current economic and industry conditions have reduced discretionary consumer income and affected demand for single use products and caused a usage shift from national brands to lower margin private label products. In addition, increasing raw material pricing and pricing challenges have contributed to issues managing negative margin spread.
Longer-term standalone prospects for Solo Cup are constrained if a change in control does not occur. Fitch believes that until labor markets show improvement and excess industry capacity is reduced, future spending levels by consumers is uncertain and pricing pressures will continue to limit revenue and margin growth while constraining free cash flow.
A decision would also need to be made on the longer-term ownership position of Vestar Capital Partners (Vestar). Vestar owns approximately 33% of Solo Cup Investment Corp (SCIC) and controls the board of directors. In 2015, SCIC is required to redeem the $240 million of convertible participating preferred stock owned by Vestar, including all accrued and unpaid dividends, on the eleventh anniversary of its issuance. By maturity, Fitch estimates the total preferred stock obligation in excess of $600 million. Fitch believes the company would likely need to address the ownership issue before any refinancing of existing debt occurs within Solo Cup's capital structure. Solo Cup's ABL revolver (June) and secured notes (November) mature in 2013.
Additional information is available at www.fitchratings.com . The ratings above were unsolicited and have been provided by Fitch as a service to investors.
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