DBRS Assigns Provisional Ratings to Kruger Packaging Holdings L.P.

DBRS Limited (DBRS) assigned a provisional Issuer Rating of BB (high) and a provisional Senior Unsecured Notes rating of BB (high) with a recovery rating of RR3 to Kruger Packaging Holdings L.P. (KPH or the Company). All trends are Stable. KPH is expected to issue $125 million of Senior Unsecured Notes, the proceeds of which will be used to repay senior bank term debt and pay a distribution to unitholders that on a pro forma basis will slightly weaken leverage.

The ratings benefit from KPH’s position in the less volatile paper packaging industry when compared to other forest product sub-sectors, its cost-effective mills and the unique properties of some of its products that give the Company a competitive advantage. The conservative balance sheet and low leverage for the rating category are also supportive of the fact that they should give KPH some downside protection. In 2019, DBRS expects leverage as expressed by adjusted debt-to-EBITDA to be around 1.9 times and adjusted cash flow-to-debt at around 40%, levels that are strong for the ratings. However, the ratings are constrained by the Company’s niche position and lack of diversification in the broader paper and forest products industry, its low (albeit increasing) forward integration into its corrugated box plants, its exposure to volatile input costs and the overall underlying volatility of the forest products industry.

Following the rebuild of its Trois-Rivières, Québec, newsprint machine into a containerboard machine that was completed in 2017, the Company is now well positioned to produce high-strength light-weight recycled linerboard which, due to its properties, provides a competitive advantage compared to the traditional containerboard offered by other North American manufacturers. KPH also operates a smaller white top linerboard and paperboard facility in Montréal, as well as two corrugated box plants in Québec and Ontario. Today, the Company’s forward integration is low when compared to some of its major peers, with about 35% of its containerboard production being used as an input into its two corrugated box plants (including trades). Increased forward integration would help further improve margins and create a more stable demand for its linerboard products. In 2018, the Company generated about 80% of its revenues and EBITDA from its packaging activities.

KPH also operates two pulp and paper facilities in Trois-Rivières that produce Bleached-Thermo-Mechanical-Pulp (BTMP) and uncoated groundwood paper. While BTMP production is almost exclusively sold to Kruger Inc.’s Specialty Paper division, uncoated groundwood paper is sold to third parties, mostly in the newsprint and publishing industry and to paper converters. The North American demand for newsprint has been in secular decline for many years now, but the Company has appropriately scaled down its operations in order to preserve its profitability. The pulp and paper operations generated about 20% of revenues and EBITDA in 2018, a proportion that is expected to decline further.

Going forward, DBRS expects KPH to continue to benefit from its position in the containerboard market, improve its integration and manage its financial policy in a manner that is commensurate with the current ratings. A deterioration in credit metrics caused by a change in financial policy and/or difficulties in its end-markets could cause the ratings to be downgraded. On the other hand, continued strong credit metrics, together with significant improvements in the Company’s business profile, could lead to a positive rating action.

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

The principal methodologies are Rating Companies in the Forest Products Industry (March 2019), DBRS Criteria: Guarantees and Other Forms of Support (January 2019), DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (October 2018) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

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 rated entity or its related entities did participate in the rating process for this rating action. 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.

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