Ranking Motion: Moody’s downgrades Dunn Paper Holdings, Inc to B3, outlook steady
International Credit score Analysis – 16 Dec 2020
New York, December 16, 2020 — Moody’s Buyers Service, (“Moody’s”) downgraded the company household score of Dunn Paper Holdings, Inc. to B3 from B2 and the likelihood of default score to B3-PD from B2-PD. Moody’s additionally downgraded the instrument rankings (see record beneath). The score outlook is steady. The downgrade displays earnings volatility which constrains liquidity and rising refinancing threat with the present revolver expiring in 2021 and the time period mortgage maturing in 2022.
..Issuer: Dunn Paper Holdings, Inc.
…. Chance of Default Ranking, Downgraded to B3-PD from B2-PD
…. Company Household Ranking, Downgraded to B3 from B2
….Senior Secured 1st Lien Financial institution Credit score Facility, Downgraded to B3 (LGD3) from B2 (LGD3)
….Senior Secured 2nd Lien Financial institution Credit score Facility, Downgraded to Caa2 (LGD6) from Caa1 (LGD5)
..Issuer: Dunn Paper Holdings, Inc.
….Outlook, Modified To Steady From Unfavorable
The B3 company household score displays the corporate’s small scale as a specialty paper producer, weak credit score metrics (gross debt/EBITDA as adjusted by Moody’s of round 6.1x within the twelve months ended September 2020) and earnings volatility pushed by the corporate’s publicity to pulp costs. The score additionally displays publicity to the machine-glazed specialty paper section which has skilled pricing pressures from bigger opponents and quantity losses throughout shutdowns associated to the coronavirus pandemic. The score is constrained by excessive buyer focus and personal fairness possession which carries greater governance and occasion dangers. The score additionally displays the necessity to refinance the entire capital construction in 2021 as the majority of debt matures in 2022. Our present assumption is that the corporate will be capable of prolong the revolver that matures in August 2021, eliminating near-term liquidity dangers, however not past the time period mortgage maturity. As a non-integrated specialty paper producer, Dunn is uncovered to unstable pulp costs even because it continues to extend the utilization of lower-cost secondary fiber in its manufacturing course of. We don’t count on a big enchancment in credit score metrics in 2021 as greater projected pulp prices will stress margins even when volumes enhance from the 2020 ranges. We count on some enchancment in volumes as a consequence of restoration in demand for machine-glazed paper, ramp up of fluorocarbon free paper volumes and ongoing demand for tissue merchandise aimed on the healthcare finish market.
The credit score profile advantages from the corporate’s technological benefits and powerful market place in waxed paper in addition to introduction of its fluorocarbon free paper. The credit score profile additionally advantages from publicity to a tissue section (about 65% of tons and income 12 months to this point, however traditionally about 50% of gross sales), which has seen greater demand as a consequence of elevated hygiene requirements and new merchandise for the healthcare market.
As a specialty paper producer, Dunn Paper faces modest environmental and social dangers. Moody’s believes Dunn Paper has established experience in complying with environmental and enterprise dangers and has included procedures to deal with them in its operational planning and enterprise fashions, together with secondary fiber utilization in paper and recycled tissue manufacturing. As well as, its new machine glazed paper providing seeks to supply an answer for paper freed from per- and polyfluoroalkyl substances, extra generally known as PFAS. For now there are not any federal regulatory efforts to ban paper merchandise with these chemical substances, however there’s at the very least one ban on a state stage (Washington). The corporate at present doesn’t have any giant environmental liabilities at its mills.
Dunn Paper has some publicity to industries which are negatively affected by the coronavirus outbreak, akin to foodservice, however in most jurisdictions meals packaging manufacturing was deemed a vital service, which allowed Dunn Paper to proceed to produce its clients. We regard the coronavirus outbreak as a social threat beneath our ESG framework, given the substantial implications for public well being and security.
Governance dangers are heightened given Dunn’s private-equity possession, which carries the danger of an aggressive monetary coverage, together with debt-funded acquisitions or dividends, and decreased monetary disclosure necessities.
We view Dunn Paper as having weak liquidity because of the upcoming revolver maturity. The corporate has minimal amount of money available and modest free money movement projected in 2020 and 2021. The corporate’s revolver is present and we count on it is going to be in a position to prolong it however not past the time period mortgage maturity in August 2022. The corporate at present has full availability on the revolver, however traditionally availability was constrained by a good cushion beneath the online leverage covenant when efficiency was impacted by greater pulp costs, weaker profitability within the machine-glazed papers or a unfavorable impression on quantity from closures associated to the coronavirus pandemic. The primary lien time period mortgage amortizes at a charge of 1% per 12 months, however the firm doesn’t should make any scheduled funds till maturity because it pay as you go $17 million of the time period mortgage. The corporate has restricted headroom beneath the leverage covenant 5.50x. A lot of the property are encumbered by the secured credit score services.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Steady outlook displays expectations of flat to modest earnings progress amid some restoration in volumes offset by greater uncooked materials prices.
Given the close to time period maturities, there’s little stress to improve the score. We might improve the score if liquidity improves and the capital construction maturities are addressed, whereas adjusted Debt/EBITDA is decreased beneath 5.5x (6.1x LTM September 2020) and EBITDA/Curiosity stays above 1.5x (2x LTM September 2020).
We might downgrade the score if the corporate’s liquidity profile deteriorates, if the corporate fails to refinance the capital construction by the top of 2021 and if efficiency deteriorates such that adjusted Debt/EBITDA was anticipated to stay above 7x.
The principal methodology utilized in these rankings was Paper and Forest Merchandise Business printed in October 2018 and out there at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1105007. Alternatively, please see the Ranking Methodologies web page on www.moodys.com for a duplicate of this system.
Headquartered in Alpharetta, GA, Dunn Paper manufactures a broad vary of light-weight meals packaging paper in addition to absorbency and specialty problem merchandise. The corporate operates seven mills with annual capability of 270,000 tonnes of specialty paper and tissue merchandise. The corporate generated roughly $341 million of gross sales for the twelve months ended September 30, 2020. The corporate is privately owned (Arbor Investments acquired Dunn Paper in August 2016) and doesn’t publicly disclose monetary info.
For additional specification of Moody’s key score assumptions and sensitivity evaluation, see the sections Methodology Assumptions and Sensitivity to Assumptions within the disclosure type. Moody’s Ranking Symbols and Definitions could be discovered at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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