DBRS Confirms Cascades Inc. at BB, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Cascades Inc. (Cascades or the Company) at BB with a Stable trend. The Senior Unsecured Debt Rating is also confirmed at BB with a Stable trend and the recovery rating remains unchanged at RR4. The confirmation reflects the Company’s gradually improving financial risk profile and its stable business risk profile. Cascades’ current ratings remain supported by its strong market position in key markets, especially as the largest producer of containerboard and tissue in Canada; its leadership position in the European boxboard market; and its solid market position in the U.S. containerboard and tissue markets. Market cyclicality continues to be a key challenge for the Company and purchased fibre costs can be quite volatile.

In the last 12 months (LTM) to March 2016, overall shipments rose. Tissue shipments benefited from the startup of the retrofitted paper machine at the St. Helens, Oregon, facility. Pricing was mixed, and U.S. dollar-denominated prices were supported by the weaker Canadian dollar. Strengthening of the Canadian dollar versus the euro negatively affected European boxboard pricing in 2015, but this trend was reversed in Q1 2016. While the European division dealt with a sharp increase in fibre costs, lower energy and fibre expenses in North America supported the consolidated EBITDA margin at 11.6% and total EBITDA of $457 million (DBRS method) on a Company-wide basis. Cascades generated another free cash flow surplus and used some of the proceeds to repay debt. The impact on total debt was somewhat mitigated by the weaker Canadian dollar as approximately 70% of the debtload is denominated in U.S. dollars. Overall, the reduced debt and better operating performance led to improved metrics.

Cost-reduction efforts and increasing output are expected to support operating performance, but DBRS does not expect material structural strengthening in the business profile in the near term. In terms of financial metrics, DBRS projects modest improvement going forward based on steady incremental production increases, relatively stable input costs and some pricing improvement. These positive drivers may be somewhat offset by a stronger Canadian dollar which, although reducing reported debt, negatively affects operating earnings despite a modest offset by the Company’s hedging program.

DBRS expects the financial profile to remain stable going forward. Should Cascades’ performance exceed DBRS’s projections, DBRS would consider applying a positive trend to the ratings. Alternatively, a sustained market downturn could lead to a negative rating action, although Cascades enjoys some cushion for its current rating at this stage.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (March 2016) and Rating Companies in the Forest Products Industry (April 2016), which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.