TEXT-S&P affirms AEP Industries Inc outlook

Overview
-- Stable operating trends at South Hackensack, N.J.-based AEP Industries
Inc. (AEP) continue to support credit quality and the current financial
risk
profile.
-- We are revising the outlook to stable from positive to reflect our
expectation that the company will not be able to materially improve its
financial profile in the near term.
-- We are affirming our 'B' corporate credit rating on the company and
our issue-level and recovery ratings on the company's senior unsecured notes.

-- The stable outlook indicates our expectation of gradually improving
operating trends, adequate liquidity, and a financial profile consistent with
the current ratings.

Rating Action
On April 27, 2012, Standard & Poor's Ratings Services affirmed its 'B'
corporate credit rating on AEP Industries Inc. At the same time, we revised
the outlook to stable from positive.

We are also affirming our issue-level rating on the company's $200 million
senior unsecured notes due 2019 at 'B-' (one notch below the corporate credit
rating). The recovery rating is '5', indicating our expectation for a modest
(10% to 30%) recovery in the event of a payment default.

Rationale
The outlook revision reflects our expectation that AEP will not be able to
materially improve its financial profile in the near term to warrant a
modestly higher rating. Despite initiatives to improve profitability, we
expect operating margins will continue to remain at or close to historical
levels. We expect this will be largely a result of ongoing raw material cost
volatility, competitive markets, potential integration challenges related to
Webster Industries and the commoditized nature of its key products.
Nevertheless, we continue to expect stable to modestly improving operating
trends partially supported by increased volumes from its recent acquisition of
Webster Industries, ongoing rationalization of facilities and various cost
reduction efforts, and synergies related to Webster Industries.

The ratings on AEP reflect the company's aggressive financial risk profile,
vulnerability to raw material price volatility, the commodity nature of its
products, and low adjusted operating margins (before depreciation and
amortization) of about 5% as of Jan. 31, 2012. The company has leading market
positions in several flexible packaging niches, but the industry's
competitiveness limits its ability to pass on input cost increases to
customers, particularly during cyclical periods of weaker demand. This
introduces volatility into operating earnings that can significantly constrain
free cash flow and reduce liquidity.

AEP, which manufactures various flexible packaging films, reported about $1
billion in revenue in the 12 months ended Jan. 31, 2012. The company is a
major producer of polyvinyl chloride food wrap, industrial films, and
polyethylene pallet-wrap stretch films. The flexible packaging industry is
competitive, marked by excess capacity, exposure to fluctuations in raw
material commodity costs, and, at times, a high degree of price competition.
Industry participants are consolidating, and we believe that AEP will continue
to seek bolt-on acquisitions, such as its recent acquisition of Webster
Industries, a manufacturer of food and trash bags. We expect potential
acquisitions that diversify its portfolio will continue to be part of AEP's
growth strategy. Although the level of acquisitions could be more active, we
expect AEP will prudently manage its financial profile and maintain liquidity
sufficient to support the current ratings.

AEP's operations are highly dependent on the price of its polymer-based raw
materials, which it acquires at market prices and does not hedge. For example,
sharply higher resin prices and weakened demand in fiscal 2008 reduced the
company's annual EBITDA to $25 million from $81 million in fiscal 2007, which
caused deterioration in credit metrics and strained liquidity. In fiscal 2009,
its credit metrics experienced the opposite effect. Adjusted EBITDA rose to
$85 million and total adjusted debt to EBITDA declined to 2.2x from 10.7x by
the end of the fiscal year. The funds from operations (FFO) to total adjusted
debt has been about 15% in the past few years and as of Jan. 31, 2012, FFO to
total adjusted debt was about 14.2%.

Although AEP raises product prices in an attempt to recoup increases in resin
costs, competitive industry conditions could limit the company's ability to
fully pass through these expenses. This should somewhat limit earnings
improvement in the near term so that operating margins remain within their
historical range and FFO to total adjusted debt averages about 15%. Based on
our scenario forecast for the next few quarters, we expect FFO to total
adjusted debt and total adjusted debt to EBITDA will be about 15% and 4.5x,
respectively. Although we expect some volatility in raw material prices in the
next few quarters, we expect AEP to maintain operating margins (before
depreciation and amortization) at about 5%, supporting these credit metrics.

Liquidity
AEP's liquidity is "adequate." As of Jan. 31, 2012, availability under its
$150 million asset-based loan (ABL) revolving credit facility was $99 million
with about $44 million outstanding. The amount available for borrowing is
based on the sum of eligible assets, including inventories and receivables.
The borrowing base as of Jan. 31, 2012, was $143.2 million. The credit
agreement requires maintenance of a springing financial covenant, and the
company was compliant with these covenants as of Jan. 31, 2012. This springing
minimum fixed-charge coverage covenant of 1x comes into effect if the average
excess availability is less than $22.5 million. During the last few quarters,
excess availability and average availability were sufficiently greater than
the springing covenant levels. We expect AEP to continue to maintain similar
availability levels and should not be subject to its springing covenant in the
next few quarters.

Based on our scenario forecast, we expect free cash flow will be negative in
2012 with increased capital expenditures of about $25 million to $30 million
mainly related to new equipment at Webster Industries and moderate uses for
working capital expected this year. Debt maturities should be manageable with
the ABL revolving credit facility due in 2017 and its senior unsecured notes
due in 2019. AEP has a nominal amount of pension obligations, which is
manageable, and no material environmental liabilities.

Our assessment of AEP Industries Inc.'s liquidity profile incorporates the
following expectations and assumptions:
-- We expect the company's sources of liquidity, including cash and
facility availability, to exceed its uses by 1.2x or more over the next 12-18
months.
-- We expect net sources to remain positive, even if EBITDA declines 15%.
-- Because of the liquidity provided through the company's revolving
credit availability, we believe it could absorb low-probability, high-impact
shocks.

Recovery analysis
For the complete recovery analysis, please see the recovery report to be
published later on RatingsDirect.

Outlook
The outlook is stable. We expect operating trends to be stable with modest
improvement in the next few years, reflecting the materialization of various
synergies related to the Webster Industries acquisition and our expectation of
gradually improving economic conditions. Although we expect that management
will face some challenges in integrating Webster Industries this year, we
expect AEP will continue to maintain key credit metrics, adequate liquidity,
and a financial policy consistent with the ratings. For the current ratings,
we expect FFO to total adjusted debt to remain about 15%.

We could raise the ratings if operating margins improve materially and demand
continues to increase so that free cash flow generation improves over time.
This would entail a strengthened ratio of FFO to total adjusted debt near 20%
consistently through a business cycle.

On the other hand, we could lower ratings if operating margins deteriorate,
resulting in lower-than-expected profitability and credit metrics. Based on
our scenario forecast, we could lower the ratings if operating margins
decrease by 200 basis points or more from current levels. At this level, we
expect the FFO to total adjusted debt ratio to drop below 10% and total
adjusted debt to EBITDA to increase to more than 7x. We could also lower the
ratings if unexpected business challenges or financial policy decisions have
significantly hurt liquidity or stretch the financial profile beyond
acceptable levels for the ratings.

Related Criteria And Research
-- Industry Economic And Ratings Outlook: U.S. Packaging Sector Ratings
Remain Stable, Jan. 24, 2012
-- U.S. Speculative-Grade Packaging Companies Have Pushed Their
Refinancing Burden To 2013 And Beyond, Sept. 2, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- Key Credit Factors: Methodology And Assumptions On Risks In The
Packaging Industry, Dec. 4, 2008
Ratings List

Ratings Affirmed; Outlook Action
To From
AEP Industries Inc.
Corporate Credit Rating B/Stable/-- B/Positive/--

Ratings Affirmed

AEP Industries Inc.
Senior Unsecured
Local Currency B-
Recovery Rating 5