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Graphic Packaging International, LLC -- Moody's assigns Baa3 to Graphic Packaging's new senior secured notes

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Rating Action: Moody's assigns Baa3 to Graphic Packaging's new senior secured notesGlobal Credit Research - 01 Mar 2021New York, March 01, 2021 -- Moody's Investors Service, ("Moody's") assigned a Baa3 rating to Graphic Packaging International, LLC's proposed senior secured notes due in 2024 and 2026. Proceeds from the notes will be used to paydown a portion of the existing term loans. All other ratings will remain unchanged.The senior secured debt is rated Baa3 (one notch above the Ba1 CFR), reflecting its preferential position in the capital structure and the loss absorption cushion provided by the unsecured notes and other unsecured obligations. The notes are secured by the first priority liens on all of the assets of the issuer and the guarantors that also secure the company's and the guarantors' obligations under the credit agreements. The notes are guaranteed by Graphic Packaging International Partners, LLC and all significant domestic operating subsidiaries that guarantee secured credit agreements and existing notes.Assignments:..Issuer: Graphic Packaging International, LLC....Gtd. Senior Secured Regular Bond/Debenture, Assigned Baa3 (LGD2)RATINGS RATIONALEThe Ba1 corporate family rating is supported by the company's scale, its leading market position in a consolidated industry and projected earnings growth supported by stable food and beverage and consumer end markets (which account for roughly over 70% of sales). Graphic Packaging is the largest North American producer of coated unbleached kraft (CUK) paperboard and coated recycled paperboard (CRB) and the second largest producer of solid bleached sulfate (SBS) board and benefits from the ability to move products between different substrates and actively managing supply to match demand and support pricing.The credit profile reflects expectations that the company would return leverage metrics within its target in 2022 after it completes its current heavy capital investment cycle, uses free cash flow to pay down debt and redeems the majority of International Paper's outstanding partnership units with shares. Additionally, the credit profile reflects expectations of earnings growth as the company benefits from substitution from plastic into paper packaging and relies on fairly stable food and beverage consumer end markets.The rating is constrained by credit metrics above its own leverage target, exposure to volatile recycled fiber costs (less than a third of production capacity), ongoing softness in the foodservice sector due to the coronavirus pandemic, and expectations of continued acquisitions to supplement organic growth as management targets increasing revenue by over 50% to reach $10 billion in 2025.Graphic Packaging's SGL-2 speculative grade liquidity rating indicates good liquidity. The company maintains low cash balances and relies on internally generated cash and a large revolver for its liquidity. Graphic Packaging had approximately $178 million of cash on hand as of December 2020, and the company generates over $1 billion of EBITDA. The largest cash use over the next two years will be capital expenditures. Interest expense is around $130 million, the company has terminated its largest pension plan and its cash taxes are low. The company does not expect to be a meaningful U.S. federal cash taxpayer until 2024 due to available net operating losses, other tax attributes, tax benefits associated with planned capital projects and the anticipated reduction in IP's investment in the partnership. The company has almost full availability under its $1.45 billion revolver and also has approximately $109 million availability under its senior secured international credit facilities.The next maturity is $250 million of notes due in November 2022. The revolver and $1.4 billion of term loans are due in 2023. The company's credit agreement has a total leverage ratio covenant of 4.25x as well as an interest coverage covenant of 3.0x. The leverage covenant steps up to 4.5x for four quarters for an allowed acquisition, so long as there at least one quarter between four quarter periods when leverage does not exceed 4.25x. Moody's expects the company will remain in compliance with its debt covenants over the next 12 months. Graphic Packaging also uses various receivables securitization arrangements to fund working capital.As a manufacturing company, Graphic Packaging is moderately exposed to environmental risks such as air and water emissions, and social risks such as labor relations and health and safety issues. The company has established expertise in complying with these risks and has incorporated procedures to address them in their operational planning and business models.The stable ratings outlook reflects expectations that Graphic Packaging will continue to grow its earnings and will return to its own leverage targets within its target levels in 2022.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFor the ratings to be upgraded to the investment grade level, the company's management would need to publicly commit to maintaining investment-grade financial policies and achieve an unsecured capital structure. The company would also need to maintain debt/EBITDA below 3.0x, maintain EBITDA margin above 16% and retained cash flow to debt above 20%.The ratings could be downgraded if operating performance and credit metrics deteriorate such as debt/EBITDA rising to 4.0x and retained cash flow to debt falls below 15% (on sustained basis). The ratings could also be downgraded if the Kalamazoo machine investment encounters significant cost overruns or delays, and the company undertakes a large debt-financed acquisition or shareholder-friendly actions that stress its credit metrics and cash flow generation.Headquartered in Atlanta, GA, Graphic Packaging is one of North America's leading manufacturers of CUK, CRB and SBS paperboard packaging for food, food service, beverages and consumer goods. Graphic Packaging generated sales of approximately $6.6 billion for the twelve months ended 31 December 2020.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.REGULATORY DISCLOSURESFor 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 aresolicited. 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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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. 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