S&P raises GP's corporate credit, issue-level ratings to A from A-, raises stand-alone credit profile to bbb+ from bbb, rating outlook stable; upgrade reflects recent debt reduction, prospects for cash flow, strong liquidity position, says ratings agency
October 22, 2012
"The upgrade reflects GP's recent debt reduction, prospects for meaningful free cash flow generation over the upcoming two years, and strong liquidity position currently estimated in excess of $3 billion," said Standard & Poor's credit analyst Tobias Crabtree. We anticipate leverage being maintained below 2.5x and annual free cash flow exceeding $1 billion in 2013 and 2014. Under our baseline scenario, we believe the company has the financial flexibility to accommodate growth initiatives, including capital expenditures and modest acquisitions, without meaningfully increasing its leverage above our anticipated level.
The ratings on GP reflect the company's own credit characteristics and our view that its credit profile is enhanced by the strength of its parent, Koch Industries Inc. (Koch; not rated). The corporate credit rating incorporates a two-notch uplift from GP's 'bbb+' stand-alone credit profile to reflect the strategic importance of GP to Koch. Since 2007, Koch has extended $2.1 billion of support for GP in various forms and has facilitated GP's deleveraging by foregoing dividends and infusing capital in conjunction with prior refinancings and acquisitions made by GP.
The company's broad product diversity, attractive cost positions in its diverse segments, leading market shares in many of the product categories in which it competes, and relatively steady earnings and funds from operations (FFO) support our assessment of the company's business risk profile as "strong." The ratings also reflect the company's highly competitive end markets and the cyclicality of its paper, packaging, and building products segments. Still, though many of GP's products are subject to some cyclicality, its earnings and cash flow swings are not as extreme as those of less-diversified forest products companies because the product cycles generally do not all coincide with one another. The ratings also incorporate our view of GP's financial policies as being consistent with an investment-grade rating and its "strong" liquidity. The ratings are based on our expectations that GP will not make any cash distributions to Koch in the next two to three years that meaningfully affect liquidity or leverage. In addition, we expect that GP will finance any sizable acquisitions in a manner that will not harm credit quality.
We believe GP's business mix is attractive because it includes the manufacturing of recession-resistant consumer products (principally paper towels, bathroom tissue, and disposable tableware), plus paper, packaging, pulp, and building products. In our view, the company benefits from large-scale, low-cost manufacturing, particularly in tissue and corrugated packaging. In several product categories, it has a value-added focus, which continues to result in its attaining higher operating margins than those of the commodity producers.
The rating outlook is stable. Based on our expectations for GP to generate annual free cash flow in excess of $1 billion in each of the next few years, we anticipate credit measures will remain consistent with an intermediate financial risk profile and 'bbb+' stand-alone credit profile. Considering the company's strong business risk profile, we consider debt to EBITDA at 2.5x or below and FFO to debt in excess of 30% to be acceptable for the current rating.
We could raise the ratings if GP's financial risk profile improves to "modest" such that we were confident that it could sustain leverage about 2x and FFO to debt at 45%. We would also need to assess whether GP's financial policies are consistent with a higher rating.
We could lower the ratings if credit measures were to materially worsen from our expected levels such that debt to EBITDA would exceed 3x and FFO to debt were to approach 25%. That could occur because of (among other considerations) a substantial rise in raw material costs, competitive actions in consumer products that weigh more heavily than expected on tissue pricing, or our view that a recovery in housing starts would likely reverse in 2013. In addition, we could lower the ratings if the company undertakes any growth or shareholder-friendly transactions in a manner that causes us to consider its financial policies to be more aggressive than we had thought.
RELATED CRITERIA AND RESEARCH
Industry Report Card: U.S. Natural Resources Split As Housing Boosts Building Products Companies While A Tough Market Puts Coal Miners Deeper In The Hole, Oct. 8, 2012
Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
Key Credit Factors: Criteria For Rating The Forest Products Industry, Dec. 11, 2009
2008 Corporate Criteria: Analytical Methodology, April 15, 2008
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