DBRS Morningstar Confirms Kruger Packaging Holdings L.P. at BB (high), Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes (the Notes) rating of Kruger Packaging Holdings L.P. (KPH or the Company) at BB (high). DBRS Morningstar also confirmed the recovery rating of RR3 on the Notes. All trends remain Stable. The ratings confirmation reflects KPH’s performance amidst robust e-commerce related packaging demand and the Company’s actions to preserve cash during 2020 to maintain key credit metrics consistent with the rating category, despite the Coronavirus Disease (COVID-19)-related disruptions in its supply chain and end markets. The Stable trends reflect DBRS Morningstar’s expectation that KPH will continue operating its business in an efficient manner while keeping leverage commensurate with the ratings, such as adjusted debt-to-EBITDA around or below 2.0 times (x) and adjusted cash flow-to-debt above 40%, levels that are strong for the ratings.

The ratings also take into account KPH’s position in the less volatile paper packaging industry when compared with other forest product subsectors, stable end-market customers, its cost-effective mills, and the unique properties of some of its products that give the Company a competitive advantage. The financial policy and leverage also remain supportive for the rating category. 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, and its exposure to volatile input costs.

KPH's earnings and cash flow weakened modestly in 2020, primarily due to pandemic-related disruptions. The key credit metrics also deteriorated year over year (YOY) in 2020 but remained supportive of the overall ratings. KPH generated 81% and 88% of revenue and EBITDA, respectively, in 2020 from its Containerboard, Paperboard & Boxes segment, with the remainder from Paper & Pulp Products segment. 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.

Since the rebuild of its Trois-Rivières, Québec, newsprint machine into a containerboard machine, which was completed in 2017, the Company is well positioned to produce high-strength light-weight recycled linerboard. The Company’s forward integration is low when compared with some of its sector-leading 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.

DBRS Morningstar expects KPH to continue to benefit from its stable end markets in the containerboard segment, to improve its integration, and to manage its financial policy in a manner that is commensurate with the current ratings. DBRS Morningstar considers a positive rating action unlikely in the near term. However, a deterioration in its financial and operational performance and/or sustained weakness in key credit metrics could lead to a ratings downgrade.

ESG CONSIDERATIONS
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 Forest Products Industry (March 16, 2021; https://www.dbrsmorningstar.com/research/375290), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 24, 2020; https://www.dbrsmorningstar.com/research/366063), 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).

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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