DBRS Morningstar Places Kruger Products L.P. Issuer and Senior Unsecured Notes Ratings Under Review with Developing Implications

DBRS Limited (DBRS Morningstar) placed Kruger Products L.P.’s (KPLP or the Company) Issuer Rating of BB and Senior Unsecured Notes rating of B (high) with a Recovery Rating of RR6 Under Review with Developing Implications. This rating action follows KPLP’s announcement of a planned $240 million investment (the Project) to expand its Sherbrooke, Québec, plant with the addition of a bathroom tissue converting line (the BT line), as well as to build a new facility that will house a light dry crepe tissue machine (the LDC machine) and a facial tissue converting line (the FT line). The Company expects to fund the Project 100% with debt, of which $165 million is expected to be financed by Investissement Québec, while the remaining $75 million is expected to be financed by a senior bank facility. Of Investissement Québec’s $165 million investment, $118 million is expected to be invested in Kruger Products SB Inc. (KPSB) by way of a $75 million convertible debenture and a $43 million subordinated loan. KPSB is a newly created wholly owned subsidiary of KPLP, which will operate the LDC machine and the FT line. Investissement Québec’s remaining $47 million investment in the Project is expected to be by way of a subordinated loan to Kruger Products Sherbrooke Inc., which will house the BT line. Construction of the Project is likely to start in the summer of 2022. The BT and FT lines will be commissioned in 2022 and 2023, respectively, while the LDC machine is likely to start up in 2024. The additional capacity from the Project will facilitate the expansion of KPLP’s product offering and grow its market share.

DBRS Morningstar’s ratings are based on KPLP’s deconsolidated financial statements, which exclude subsidiaries that are unrestricted and nonrecourse to the Company (i.e., the through-air-dried projects).

The Under Review with Developing Implications status reflects DBRS Morningstar’s view that KPLP’s business profile should benefit from increased scale and market share growth once the Project ramps up. It also reflects the uncertainty around the Project’s final financing terms and conditions and the impact thereof on KPLP’s credit risk profile. In its review, DBRS Morningstar will focus on (1) assessing the Project’s business impact including execution risk, (2) the impact of the final Project financing terms and conditions on KPLP’s credit risk profile, and (3) the Company’s longer-term financial management intentions. DBRS Morningstar aims to resolve the Under Review status on closing, which is expected to be in May 2021.

KPLP’s current ratings continue to be supported by its strong brands and leading market position in the Canadian tissue products market, stable demand, and significant barriers to entry. The current ratings also continue to reflect the intense competition, volatile input costs, and product/market concentration.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Consumer Products Industry (July 30, 2020; https://www.dbrsmorningstar.com/research/364690/rating-companies-in-the-consumer-products-industry), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/364690/rating-companies-in-the-consumer-products-industry), and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020; https://www.dbrsmorningstar.com/research/364690/rating-companies-in-the-consumer-products-industry), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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