TEXT-S&P: Sealed Air Corp. Prop Nts, Term Lns Asgnd Rtgs

Wed Nov 14, 2012 7:23pm EST

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Overview

-- Elmwood Park, N.J.-based packaging producer Sealed Air Corp. is refinancing its senior secured term loans and unsecured notes.

-- We assigned a 'BB-' issue rating and '4' recovery rating to Sealed Air's proposed $850 million notes to be issued in two tranches with eight- and 10-year maturities.

-- We assigned a 'BB' issue rating and a '2' recovery rating to Sealed Air's proposed $800 million senior secured term loan B due 2018, and proposed $80 million Japanese term loan A due 2016.

-- At the same time, we affirmed all our existing ratings on the company, including the 'BB' corporate credit rating.

-- The stable outlook reflects our expectation that Sealed Air's credit measures are likely to improve somewhat given the company's continued debt reduction.

Rating Action

On Nov. 14, 2012, Standard & Poor's Ratings Services assigned its 'BB-' issue rating and '4' recovery rating to Sealed Air's proposed $850 million notes to be issued in two tranches with eight- and 10-year maturities. The company will use proceeds from the notes issuance, along with cash in hand, to refinance its outstanding 5.625% senior notes due 2013 and 7.875% senior notes due 2017.

We also assigned a 'BB' issue rating and a '2' recovery rating to Sealed Air's proposed $800 million senior secured term loan B due 2018. In addition, we assigned a 'BB' issue rating and a '2' recovery rating to the company's proposed $80 million Japanese term loan A due 2016. Sealed Air Japan Holdings G.K. and Sealed Air Japan Ltd. are borrowers under the Japanese yen-denominated term loan A. Likewise, Sealed Air Corp. and Cryovac Inc. are borrowers under the U.S. dollar-denominated tranche of the term loan B. Sealed Air B.V., Sealed Air Netherlands Holdings BV, and Diversey Europe BV Netherlands are borrowers under the Euro denominated tranche of the term loan B. The company will use term loan proceeds along with $300 million in estimated net proceeds from the sale of the Diversey operations in Japan to refinance $1 billion in existing term loan B and the existing $121 million Japanese term loan A.

We also affirmed all existing ratings on the company, including the 'BB-' corporate credit rating. The recovery rating on the secured debt remains unchanged at '2', indicating our expectation of substantial (70%-90%) recovery of principal and interest in the event of payment default. The recovery rating on the unsecured debt remains '4', indicating our expectation of an average (30%-50%) recovery in the event of payment default.

Rationale

Standard & Poor's Ratings Services' ratings on Sealed Air Corp. reflect the company's strong business risk profile and aggressive financial risk profile, including the increased debt leverage resulting from its $4.7 billion acquisition of Diversey Holdings Inc. in October 2011. With sales of about $7.7 billion for the 12 months ended Sept. 30, 2012(excluding the recently sold Diversey Japan business), Sealed Air is a leading global manufacturer of various packaging and performance-based materials and equipment systems that serve an array of food, industrial, medical, and consumer applications. Its acquired operations include cleaning and hygiene products, and related services for institutional and industrial cleaning. Sealed Air generates more than 60% of its revenue outside of North America and 23% from developing markets.

Although the Diversey acquisition has extended Sealed Air's offerings to food-related end markets, a significant portion of combined sales is from nonfood applications. Besides the economy, changes in meat consumption patterns, such as those related to the cost of meat, reported outbreaks of bovine spongiform encephalopathy (mad cow disease) or avian influenza, and trade restrictions can affect the food packaging business. Sealed Air's sales to its relatively stable food and beverage customers make up about 49% of total sales. The company derives about 28% of sales from cleaning and sanitation product sales, mainly to building management/service contractors and to retail, lodging, and health-care end markets. Protective packaging represents about 21% of sales. This category is somewhat cyclical because most of its sales depend on manufacturing sector volumes. Operations should benefit from attractive long-term demand growth trends, such as increased emphasis on food safety and security, health and hygiene, and growing protein consumption worldwide. However, curtailed capital spending levels, in part, to maximize free cash flow for debt reduction, could potentially hamper long-term growth prospects.

Near-term challenges include the weak economic outlook in Europe, competitive pressures to Diversey's business, and declining beef consumption trends in the U.S. and Europe (which could be further affected in the U.S. by drought conditions that could result in higher retail meat prices). As a result, our ratings on Sealed Air factor in our expectation that the company's adjusted EBITDA will be about $1 billion in 2012, and we expect the company's EBITDA will improve only modestly in 2013 on the back of cost synergies achieved. We believe any improvement in the European operations (about 33% of sales) remains uncertain due to very low GDP growth that we currently expect in this region under our base-case scenario.

In the third quarter of 2012, Sealed Air recorded an estimated non-cash, pretax charge of $1.3 billion for impairment of goodwill and certain intangible assets related to the Diversey segment. Given the addition of Diversey's lower margin business, and sluggish sales volumes, Sealed Air's adjusted EBITDA margins deteriorated to 13% in 2012 from 16%-17% historically. However, somewhat offsetting the weaker earnings trend, the company is implementing its integration and optimization plan with expected cost synergies of about $195 million to $200 million by 2014. It plans to achieve this mainly through headcount reduction, procurement savings, and facility consolidations. The company expects restructuring costs of about $235 million to achieve these synergies.

Sealed Air's debt leverage increased significantly following the Diversey acquisition. As of Sept. 30, 2012, its funds from operations (FFO)-to-adjusted debt was below 10%, pro forma for the company's asbestos-related settlement payment and assuming it uses all but $100 million of cash on hand to fund the settlement. We believe that management will apply discretionary cash flow to debt reduction to gradually improve its financial profile. The company will use expected net after-tax proceeds of $300 million from the sale of the Diversey operations in Japan to prepay a portion of the term loans outstanding under its senior secured credit facilities. We consider FFO-to-total adjusted debt of 12% to 15% as appropriate for the rating. Given the need for improvement in the company's financial profile, the ratings would not support additional acquisitions or share repurchases until credit measures strengthen to appropriate levels.

In November 2003, Sealed Air signed a definitive settlement agreement with the Committee of Asbestos Personal Injury Claimants and the Committee of Asbestos Property Damage Claimants in the bankruptcy proceedings for chemical company W.R. Grace & Co. (Sealed Air purchased the Cryovac packaging business from Grace in 1998.) Under the agreement terms, Sealed Air is to pay the settlement in full when W.R. Grace & Co. emerges from bankruptcy on the reorganization plan's effective date. The payments include $512.5 million in cash, with interest accruing at 5.5% annually since December 2002, and 18 million shares of Sealed Air common stock. The reorganization plan includes establishing one or more trusts under Section 524 of the Bankruptcy Code. The settlement will provide protection to Sealed Air against all current and future Grace-related asbestos, fraudulent transfer, and successor liability claims made against it in connection with the Cryovac acquisition. In January 2012, the U.S. District Court of Delaware confirmed Grace's reorganization plan. However, the District Court rulings remain subject to further appeals, which need to be resolved in order for Grace to emerge in 2013 or later.

Liquidity

We consider Sealed Air's liquidity to be "adequate." As of Sept. 30, 2012, Sealed Air had about $541 million in cash, and almost full availability under its $700 million revolving credit facility expiring in 2016. The company also has a $125 million U.S. accounts receivables securitization program maturing in September 2013, $118 million of which was available at Sept. 30, 2012.

We expect free cash generation of about $375 million in 2012, after reduced capital spending of $130 million. In addition to prioritizing discretionary cash flows (after annual dividend outlays of around $100 million) for debt reduction, we also expect management to maintain significant liquidity in anticipation of the asbestos-related settlement agreement payment (about $866 million including accrued interest as of Sept. 30, 2012), which Sealed Air will make when Grace emerges from bankruptcy.

Our assessment of Sealed Air's liquidity as adequate incorporates the following:

-- We expect sources of cash to exceed cash usage by 1.2x or more, during the next 12 to 18 months;

-- We expect sources to remain positive even in the unlikely event of a 20% EBITDA decline;

-- The credit agreement governing the senior secured credit facilities includes a maximum net debt leverage ratio, and the covenant is being amended to provide additional cushion with respect to compliance; and

-- Pro forma for the refinancing, the debt maturity profile seems manageable and mainly includes scheduled term loan A and term loan B amortization during the next few years.

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

Outlook

The outlook is stable. During the next few years, we expect Sealed Air to use discretionary cash flow primarily for debt reduction until credit measures strengthen to appropriate levels. We believe Sealed Air should be adequately positioned to make the asbestos-related settlement payment if Grace exits bankruptcy in 2013 or later. Given the uncertainties related to timing and resolution of the asbestos settlement payment, we have not factored in a potential tax refund (the amount and timing of which are uncertain and subject to IRS review) and resultant debt reduction in our scenario.

We could lower the ratings if earnings deteriorate materially from current levels--owing to a deeper recession in Europe--causing adjusted leverage to remain at or above 5x on a sustained basis and FFO-to-total debt to remain below 10% without prospects for recovery. This could occur if revenues declined by 5% or more, and operating margins declined by 100 basis points or more from current levels.

The potential upside to the rating is limited in the next 12 months. We could raise the rating thereafter if Sealed Air further improves its sales growth and profitability, and boosts its credit measures and financial flexibility. We could raise the ratings if credit measures strengthen more than we expect, with Sealed Air achieving and maintaining FFO-to-total adjusted debt in the 15% to 20% after paying the asbestos-related settlement.

Related Criteria And Research

-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010

-- Key Credit Factors: Methodology And Assumptions On Risks In The Packaging Industry, Dec. 4, 2008

Ratings List

Ratings Affirmed

Sealed Air Corp.

Corporate credit rating BB-/Stable/--

Sealed Air Corp.

Senior secured BB

Recovery rating 2

Senior unsecured BB-

Recovery rating 4

New Rating Sealed Air Corp.

Cryovac Inc.

Senior secured

US$575 mil term B bank ln due 2018 BB

Recovery rating 2

Sealed Air Corp.

Senior unsecured

US$0 mil nts due 2020 BB-

Recovery rating

US$0 mil nts due 2022 BB-

Recovery rating 4

Diversey Europe B.V.

Sealed Air B.V.

Sealed Air Netherlands Holdings B.V.

Senior Secured

EUR0 mil term B bank ln due 2018 BB

Recovery Rating 2

Sealed Air Japan Holdings G.K.

Sealed Air Japan Limited

Senior Secured

JPY0 mil term A bank ln due 2016 BB

Recovery rating 2

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