TEXT-S&P assigns NewPage's proposed loan preliminary 'BB' rating
Overview -- U.S. Coated paper manufacturer NewPage Corp. expects to emerge from Chapter 11 bankruptcy protection and significantly reduce its total debt and meaningfully lower interest expense. -- We are assigning our preliminary 'BB' issue-level rating to the company's proposed six-year, $500 million senior secured term loan. The term loan has a preliminary recovery rating of '1'. -- We expect to assign a 'B+' corporate credit rating with a stable rating outlook to the reorganized company upon its emergence. The preliminary issue rating and expected 'B+' corporate credit rating are subject to NewPage's timely emergence from bankruptcy and consummation of its plan of reorganization in line with our expectations, including its proposed exit financing. -- The expected stable outlook reflects the lower post-emergence leverage and good prospects for meaningful free cash flow generation over the upcoming 12 to 18 months despite the significant challenges in declining North American coated paper end markets. In addition, the outlook incorporates our view of the company's strong liquidity position given the lack of financial maintenance covenants and no significant debt maturities over the next five years. Rating Action On Dec. 18, 2012, Standard & Poor's Ratings Services assigned its preliminary 'BB' issue-level and '1' preliminary recovery rating to Miamisburg, Ohio-based NewPage Corp.'s proposed $500 million senior secured term loan. The preliminary '1' recovery rating incorporates our expectation of very high (90% to 100%) recovery of principal in the event of a postemergence default by the company. Rationale The rating action reflects NewPage's recent announcement that the U.S. Bankruptcy Court has confirmed the company's Chapter 11 plan of reorganization. Under the terms of the plan, NewPage would reduce its total reported debt to $500 million from over $4 billion and lower its annual interest expense by approximately $345 million to about $45 million. The preliminary 'BB' issue-level rating and expected 'B+' corporate credit rating are subject to NewPage's timely emergence from bankruptcy and consummation of its plan of reorganization in-line with our expectations, including its proposed exit financing. The preliminary and expected ratings are subject to the company's $350 million asset-based lending facility (ABL) and $500 million term loan being finalized on substantially the same terms as represented to us in November 2012. If the company cannot obtain exit financing as proposed and it emerges from bankruptcy with a significantly different capital structure, we could withdraw the preliminary ratings and assign a lower corporate credit rating. The preliminary and expected ratings are also subject to the final documentation and our review of legal matters that we believe are relevant to our analysis, as outlined in our criteria. The expected 'B+' corporate credit rating reflects our view of NewPage's 'vulnerable' business risk profile derived from its limited product and geographic diversity, substitution risks due to changing customer preferences for greater electronic content, and vulnerability to fluctuations in volatile coated paper selling prices and raw material and energy costs. Our ratings also incorporate our assessment of the company's "significant" financial risk and "strong" liquidity position. In our view, post-emergence credit measures will benefit from a substantial reduction in total debt and interest expense such that leverage is likely to be maintained below 3.5x and interest coverage to exceed 5x over the next 12 to 18 months. In addition, the company's strong liquidity position results from the financial flexibility afforded by the absence of near-term debt maturities and financial maintenance covenants and good prospects for free cash flow generation even under a stressed scenario. Our forecast for 2012 and 2013 EBITDA for the reorganized NewPage reflects a cautious economic outlook over this period. Our forecast incorporates our view that demand for coated paper, which constitutes over 70% of the company's sales, will continue to be challenged by weak advertising spending and continuing shifts in consumer preferences for electronic content away from paper-based sources. We project the company's EBITDA for 2012 to be approximately $250 million. For 2013, absent an increase in coated paper prices, EBITDA is unlikely to meaningfully improve from 2012's projected levels. Key assumptions to our EBITDA forecast include: -- Annual real GDP growth of 2.3% in 2013; -- Low-to-mid single-digit percentage declines in overall coated paper demand coupled with slight market-share gains result in flat to slight declines in NewPage's total coated-paper tons shipped; -- Average selling prices for 2013 coated paper remain near anticipated 2012 average levels; and -- Cost-savings and productivity initiatives offset our modest anticipated increases in pulp, chemicals, and energy costs. Key downside risks to our forecast include a U.S. recession that could accelerate the secular demand decline for coated papers over the near term. In addition, a material increase in raw material and energy costs that NewPage cannot offset through price increases or cost savings could also significantly reduce profitability. A key upside risk to our EBITDA forecast would result from increases in coated paper selling prices. We believe that NewPage's financial results and credit measures will fluctuate widely during the course of a cycle because coated paper demand correlates closely to general economic conditions and highly cyclical advertising spending. The proposed capital structure upon emergence includes about $500 million of term loan debt with pro forma 2012 leverage of about 3x (which includes our adjustments for over $280 million of estimated pension-related liabilities). In our view, the lower debt and meaningfully reduced interest burden could produce credit measures in line with our assessment of a significant financial risk profile, with leverage maintained between 2.5x and 3.5x, interest expense above 5x, and funds from operations (FFO) to debt between 20% and 25%. Although we expect NewPage's financial results to fluctuate along with industry cyclicality, we would expect leverage no greater than 4x given our view of the company's vulnerable business risk. Liquidity Based on the proposed exit financing, we assess NewPage's liquidity position to be strong based on the following assumptions: -- We expect sources of liquidity (including forecasted FFO, cash balances, and availability under the ABL) will exceed uses by 1.5x or more in 2013; -- We expect that liquidity sources will continue to exceed uses, even if forecasted EBITDA were to decline by 30%; and -- The proposed new term loan has no financial maintenance covenants. The company has indicated that it expects the new $350 million ABL credit facility to be undrawn at closing, with approximately $20 million of cash on hand. We anticipate the company's excess availability will exceed the ABL's thresholds necessary to avoid the springing minimum fixed-charge coverage ratio of 1x. We expect the reorganized NewPage to be able to generate annual FFO of between $150 million and $200 million over the upcoming two years, more than sufficient to cover estimated annual capital expenditures of between $100 million and $125 million and required annual term loan amortization of 1% in year one and 5% thereafter. The company estimates that it may be required to make cash pension contributions of approximately $25 million in 2013 with potentially higher required annual contributions in each of the next several years. We estimate free cash flow (including required pension cash outlays) could remain positive even under a stressed scenario where projected EBITDA falls to $200 million and is sustained at that level. Recovery analysis For the complete recovery analysis, see our recovery report on NewPage, to be published shortly after this release on RatingsDirect. Outlook We expect to assign a stable rating outlook to the expected 'B+' corporate credit rating supported by the company's strong liquidity position and significant debt and interest expense reduction post-emergence which is anticipated to result in good free cash flow generation over the next year. We believe the company's low leverage affords it significant financial flexibility over the near-to-intermediate term to meet its capital expenditure requirements and withstand the secular decline in its coated paper end markets and vulnerability of earnings to changes in coated paper prices and input costs. An upgrade is limited by our assessment of NewPage's vulnerable business risk given the substantial challenges facing the North American coated paper industry. In addition, ratings upside is limited by the likely influence that the new equity owners will have over financial policy, such as dividends. We could downgrade the company if its financial profile were revised to "aggressive" as a result of leverage exceeding 4x and FFO to debt declining to the mid-teen percentage range on a sustained basis. For this to occur, absent a change in the company's post-emergence proposed capital structure, EBITDA would have to decline in excess of 20% from our 2012 forecast. We view this as a low probability event over the upcoming year, most likely triggered by a U.S. recession accelerating the decline in coated paper demand and pressuring coated paper prices. Related Criteria And Research -- Top 10 Investor Questions For 2013: Global Forest Products, Dec. 5, 2012 -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Criteria For Rating The Forest Products Industry, Dec. 11, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Temporary telephone contact numbers: Tobias Crabtree (917-539-4614); James Fielding (917-734-3477) Ratings List NewPage Corp. Corporate Credit Rating D/--/-- New Rating NewPage Corp. Senior Secured $500 mil sr secd term loan BB (Prelim) Recovery rating 1 (Prelim) Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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