Moody's downgrades Reynolds Group's CFR to B3 from B2; outlook stable
September 7, 2012
– Moody's Investors Service ("Moody's") downgraded the corporate family and probability of default ratings of Reynolds Group Holdings Limited ("RGHL") to B3 from B2. The ratings outlook is stable. Additional instrument ratings are detailed below.
Moody's took the following rating actions:
Reynolds Group Holdings Limited
-Downgraded Corporate Family Rating to B3 from B2
-Downgraded Probability of Default Rating to B3 from B2
-The ratings outlook is stable
Reynolds Group Holdings Inc
-Downgraded EUR 80M Senior Secured Revolving Credit Facility due 11/5/2014 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)
-Downgraded US $120M Senior Secured Revolving Credit Facility due 11/5/2014 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)
-Downgraded US $2,000M Senior Secured Term Loan due 8/9/2018 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)
-Downgraded US $2,325M Senior Secured Term Loan due 2/9/2018 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)
-Downgraded EUR 250M Senior Secured Term Loan due 2/9/2018 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)
Reynolds Group Issuer Inc., Reynolds Group Issuer LLC, Reynolds Group Issuer (Luxembourg) S.A.,
-Downgraded US $1,500M 7.875% Senior Secured Notes due 8/15/2019 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)
-Downgraded US $1,125M 7.750% Senior Secured Notes due 10/15/2016 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)
-Downgraded EUR 450M 7.750% Senior Secured Notes due 10/15/2016 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)
-Downgraded US $1,500M 7.125% Senior Secured Notes due 04/15/2019 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)
-Downgraded US $1,000M 6.875% Senior Secured Notes due 02/15/2021 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)
-Downgraded US $2,241.033M 9.875% Senior Unsecured Notes due 8/15/2019 to Caa2 (LGD 5, 79%) from Caa1 (LGD 5, 79%)
-Downgraded US $8.95M 9.875% Senior Unsecured Notes due 8/15/2019 to Caa2 (LGD 5, 79%) from Caa1 (LGD 5, 79%)
-Downgraded US $1,000M 8.500% Senior Unsecured Notes due 05/15/2018 to Caa2 (LGD 5, 79%) from Caa1 (LGD 5, 79%)
-Downgraded US $1,500M 9.000% Senior Unsecured Notes due 04/15/2019 to Caa2 (LGD 5, 79%) from Caa1 (LGD 5, 79%)
-Downgraded US $1,000M 8.250% Senior Unsecured Notes due 02/15/2021 to Caa2 (LGD 5, 79%) from Caa1 (LGD 5, 79%)
Beverage Packaging Holdings (Lux) II S.A.
-Downgraded EUR 480M 8.000% Senior Notes due 12/15/2016 to Caa2 (LGD 5, 79%) from Caa1 (LGD 5, 79%)
-Downgraded EUR 420M 9.5% Sr. Subordinated Notes due 06/15/2017 to Caa2 (LGD 6, 96%) from Caa1 (LGD 6, 96%)
-Downgraded US $300M 8.125% Bonds due 06/15/2017 to Caa2 (LGD 6, 94%) from Caa1 (LGD 6, 94%)
-Downgraded US $250M 6.400% Notes (approximately $16M outstanding) due 01/15/2018 to Caa2 (LGD 6, 94%) from Caa1 (LGD 6, 94%)
-Downgraded US $276.79M 7.950% Bonds due 12/15/2025 to Caa2 (LGD 6, 94%) from Caa1 (LGD 6, 94%)
-Downgraded US $200M 8.375% Notes due 04/15/2027 to Caa2 (LGD 6, 94%) from Caa1 (LGD 6, 94%)
The downgrade of the corporate family rating to B3 from B2 reflects pro-forma credit metrics that are below forecasted levels and an expectation that future improvement may proceed more slowly than originally projected. Pro-forma debt to EBITDA is above 6.5 times and debt to revenue above 120% while free cash flow remains minimal relative to debt. RGHL has been negatively impacted by the soft economy, production inefficiencies at Graham and competition and one or more of these factors is expected to continue to drag on operating performance over the intermediate term. As outlined in the press release dated August 1, 2011, RGHL's credit metrics were stressed from a series of debt financed acquisitions and had little room for any negative variance in operating performance.
The B3 corporate family rating reflects RGHL's weak pro-forma credit metrics, integration risk and limited operating history for the combined entity. The rating and outlook also reflect the company's lengthy raw material cost pass-through provisions, concentration of sales within certain segments and acquisitiveness/financial aggressiveness. Additionally, the company has a complex capital and organizational structure and is owned by a single individual. RGHL is still integrating a large acquisition (Graham Packaging in September 2011) and remains acquisitive. The company has only been operating as a combined entity since 2007 and approximately 20.0% of pro-forma revenues are from Graham.
Strengths in the company's profile include its strong brands and market positions in certain segments, scale and high percentage of blue-chip customers. The company has strong brands and market positions and there are some switching costs for customers in certain segments. Many of RGHL's businesses had a history of strong execution and innovation prior to their acquisition and much of the existing management teams were retained. Scale, as measured by revenue, is significant for the industry and helps RGHL lower its raw material costs. The company also has high exposure to food and beverage packaging. RGHL also currently has adequate liquidity with approximately $1.2 billion in cash on hand.
The rating outlook is stable reflecting an expectation that credit metrics will improve modestly, but remain within the rating category over the horizon.
The rating could be downgraded if there is a deterioration in credit metrics, liquidity or the competitive and operating environment. The ratings could also be downgraded if the company undertakes any significant acquisition. Specifically, the ratings could be downgraded if debt to EBITDA increases to above 7.0 times, EBIT to interest expense declined below 1.0 time, and free cash flow to debt remained below 1.0%.
The rating could be upgraded if RGHL sustainably improves its credit metrics within the context of a stable operating and competitive environment while maintaining adequate liquidity including ample cushion under financial covenants. Specifically, RGHL would need to improve debt to EBITDA to below 6.3 times, EBIT to interest expense to at least 1.4 times and free cash flow to debt to above 3.5% while maintaining the EBIT margin in the high single digits.
The principal methodology used in rating RGHL was the Global Packaging Manufacturers: Metal, Glass, and Plastic Containers Industry Methodology published in June 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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