Rating Action: Moody's downgrades Dunn Paper Holdings, Inc to B3, outlook stable
Global Credit Research - 16 Dec 2020
New York, December 16, 2020 -- Moody's Investors Service, ("Moody's") downgraded the corporate family rating of Dunn Paper Holdings, Inc. to B3 from B2 and the probability of default rating to B3-PD from B2-PD. Moody's also downgraded the instrument ratings (see list below). The rating outlook is stable. The downgrade reflects earnings volatility which constrains liquidity and increasing refinancing risk with the current revolver expiring in 2021 and the term loan maturing in 2022.
..Issuer: Dunn Paper Holdings, Inc.
.... Probability of Default Rating, Downgraded to B3-PD from B2-PD
.... Corporate Family Rating, Downgraded to B3 from B2
....Senior Secured 1st Lien Bank Credit Facility, Downgraded to B3 (LGD3) from B2 (LGD3)
....Senior Secured 2nd Lien Bank Credit Facility, Downgraded to Caa2 (LGD6) from Caa1 (LGD5)
..Issuer: Dunn Paper Holdings, Inc.
....Outlook, Changed To Stable From Negative
The B3 corporate family rating reflects the company's small scale as a specialty paper manufacturer, weak credit metrics (gross debt/EBITDA as adjusted by Moody's of around 6.1x in the twelve months ended September 2020) and earnings volatility driven by the company's exposure to pulp prices. The rating also reflects exposure to the machine-glazed specialty paper segment which has experienced pricing pressures from larger competitors and volume losses during shutdowns related to the coronavirus pandemic. The rating is constrained by high customer concentration and private equity ownership which carries higher governance and event risks. The rating also reflects the need to refinance the whole capital structure in 2021 as the bulk of debt matures in 2022. Our current assumption is that the company will be able to extend the revolver that matures in August 2021, eliminating near-term liquidity risks, but not beyond the term loan maturity. As a non-integrated specialty paper producer, Dunn is exposed to volatile pulp prices even as it continues to increase the usage of lower-cost secondary fiber in its manufacturing process. We do not expect a significant improvement in credit metrics in 2021 as higher projected pulp costs will pressure margins even if volumes improve from the 2020 levels. We expect some improvement in volumes due to recovery in demand for machine-glazed paper, ramp up of fluorocarbon free paper volumes and ongoing demand for tissue products aimed at the healthcare end market.
The credit profile benefits from the company's technological advantages and strong market position in waxed paper as well as introduction of its fluorocarbon free paper. The credit profile also benefits from exposure to a tissue segment (about 65% of tons and revenue year to date, but historically about 50% of sales), which has seen higher demand due to increased hygiene standards and new products for the healthcare market.
As a specialty paper manufacturer, Dunn Paper faces modest environmental and social risks. Moody's believes Dunn Paper has established expertise in complying with environmental and business risks and has incorporated procedures to address them in its operational planning and business models, including secondary fiber usage in paper and recycled tissue production. In addition, its new machine glazed paper offering seeks to offer a solution for paper free of per- and polyfluoroalkyl substances, more commonly referred to as PFAS. For now there are no federal regulatory efforts to ban paper products with these chemicals, but there is at least one ban on a state level (Washington). The company currently does not have any large environmental liabilities at its mills.
Dunn Paper has some exposure to industries that are negatively affected by the coronavirus outbreak, such as foodservice, but in most jurisdictions food packaging production was deemed an essential service, which allowed Dunn Paper to continue to supply its customers. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
Governance risks are heightened given Dunn's private-equity ownership, which carries the risk of an aggressive financial policy, including debt-funded acquisitions or dividends, and reduced financial disclosure requirements.
We view Dunn Paper as having weak liquidity due to the upcoming revolver maturity. The company has minimal amount of cash on hand and modest free cash flow projected in 2020 and 2021. The company's revolver is current and we expect it will be able to extend it but not beyond the term loan maturity in August 2022. The company currently has full availability on the revolver, but historically availability was constrained by a tight cushion under the net leverage covenant when performance was impacted by higher pulp prices, weaker profitability in the machine-glazed papers or a negative impact on volume from closures related to the coronavirus pandemic. The first lien term loan amortizes at a rate of 1% per year, but the company does not have to make any scheduled payments until maturity as it prepaid $17 million of the term loan. The company has limited headroom under the leverage covenant 5.50x. Most of the assets are encumbered by the secured credit facilities.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Stable outlook reflects expectations of flat to modest earnings growth amid some recovery in volumes offset by higher raw material costs.
Given the near term maturities, there is little pressure to upgrade the rating. We could upgrade the rating if liquidity improves and the capital structure maturities are addressed, while adjusted Debt/EBITDA is reduced below 5.5x (6.1x LTM September 2020) and EBITDA/Interest remains above 1.5x (2x LTM September 2020).
We could downgrade the rating if the company's liquidity profile deteriorates, if the company fails to refinance the capital structure by the end of 2021 and if performance deteriorates such that adjusted Debt/EBITDA was expected to remain above 7x.
The principal methodology used in these ratings was Paper and Forest Products Industry published in October 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1105007. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Alpharetta, GA, Dunn Paper manufactures a broad range of lightweight food packaging paper as well as absorbency and specialty issue products. The company operates seven mills with annual capacity of 270,000 tonnes of specialty paper and tissue products. The company generated approximately $341 million of sales for the twelve months ended September 30, 2020. The company is privately owned (Arbor Investments acquired Dunn Paper in August 2016) and does not publicly disclose financial information.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Anastasija Johnson VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Glenn B. Eckert Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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