DBRS Places Kruger Products L.P. Under Review with Negative Implications

DBRS Limited (DBRS) placed Kruger Products L.P.’s (KPLP or the Company) Issuer Rating of BB and Senior Unsecured Notes rating of BB (low) with a Recovery Rating of RR5 Under Review with Negative Implications. The rating action follows an announcement of KPLP’s plan to invest $575 million in a tissue plant in Sherbrooke, Québec, featuring a through-air-dry (TAD) machine (the Project). The plant is expected to be financed with 40% equity and 60% debt in a wholly owned, unrestricted subsidiary (TAD2Canco). A portion of the equity will be financed by a $105 million convertible debenture from Investissement Québec at TAD2Canco; the remainder of the financing is currently being finalized. Construction of the Project is expected to begin in early 2019, and the plant is anticipated to begin production in early 2021. At maturity, the Project will produce approximately 70,000 metric tonnes per annum of bathroom tissue and paper towels to increase KPLP’s offering of tissue products under the Cashmere, SpongeTowels and Purex brands.

On April 16, 2018, DBRS noted that KPLP was currently evaluating the installation of a second TAD paper machine in a new unrestricted subsidiary. At that time, DBRS stated that should the Company finance a meaningful portion of the Project with debt at KPLP, it could have a negative impact on the Issuer Rating or Recovery Rating on the Senior Unsecured Notes (see the DBRS press release “DBRS Assigns Provisional Ratings to Kruger Products L.P.” dated April 16, 2018).

DBRS’s ratings on KPLP are on a stand-alone basis using the deconsolidated financial statements of KPLP, excluding unrestricted subsidiaries. As the operations of existing unrestricted subsidiaries could have a meaningful impact on cash flows at KPLP — either positive or negative — DBRS has done an analysis of these entities. DBRS notes that prior to the announcement of the Project, if KPLP had been treated as a fully consolidated credit that included the unrestricted subsidiaries, the Issuer Rating would have likely been the same.

The Under Review with Negative Implications status mainly reflects the uncertainty surrounding the remainder of the financing of the Project. Should the Project be financed with a significant amount of debt, even in an unrestricted subsidiary, DBRS may no longer view the fully consolidated credit as having the same Issuer Rating as KPLP on a deconsolidated basis, which could have a negative impact on the current Issuer Rating of KPLP. Alternatively, if a material portion of the equity component of the Project is funded with debt at KPLP, and this debt ranks ahead of, or in line with, the Senior Unsecured Notes, a downgrade to the Recovery Rating to RR6 is likely, causing a one-notch downgrade to the Notes.

DBRS’s review will focus on the business impact of the Project, including its effect on the Company’s revenues, market share and operating efficiency, as well as the structure, terms and conditions of the final financing package. DBRS will seek greater insight on this to resolve the Under Review status of the ratings as soon as possible.

KPLP’s ratings are supported by its strong brands and market positions in the Canadian tissue products market, efficient production facilities and effective operations; stable tissue products demand; and the significant barriers to entering the tissue products market. The ratings also reflect the Company’s exposure to volatile commodity prices while operating in a highly competitive industry, single-product/single-market exposure and the strong bargaining power of major retailers.

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 under Related Documents or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Consumer Products Industry and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on dbrs.com 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 in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.