-- U.S. coated paper manufacturer NewPage Corp. announced that it has
emerged from Chapter 11 bankruptcy protection and closed on its exit
-- We are raising the corporate credit rating to 'B+' from 'D'.
-- We are also assigning our 'BB' issue-level rating to the company's
six-year, $500 million senior secured term loan. The term loan has a recovery
rating of '1'.
-- The 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.
On Dec. 26, 2012, Standard & Poor's Ratings Services raised its corporate
credit rating on Miamisburg, Ohio-based NewPage Corp. to 'B+' from 'D'. The
outlook is stable. We also assigned a 'BB' (two notches above the corporate
credit rating) issue-level rating with a recovery rating of '1' to the
company's $500 million senior secured term loan. The '1' recovery rating
incorporates our expectation of very high (90% to 100%) recovery of principal
in the event of a post emergence default by the company.
The rating actions follow NewPage's announcement that it has emerged from
Chapter 11 bankruptcy protection pursuant to its Modified Fourth Amended
Chapter 11 Plan, confirmed on Dec. 14, 2012, by the U.S. Bankruptcy Court. In
conjunction with the plan, NewPage closed on its exit financing, consisting of
a five-year $350 million senior secured revolving credit facility and
six-year, $500 million senior secured term loan. The company has reduced its
total reported debt to $500 million from over $4 billion and lowered its
annual interest expense by approximately $345 million to about $45 million.
The '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 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 2.2% 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 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.
Based on the closed 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
-- We expect that liquidity sources will continue to exceed uses, even if
forecasted EBITDA were to decline by 30%; and
-- The term loan has no financial maintenance covenants.
Liquidity sources include a new undrawn $350 million ABL credit facility and
approximately $20 million of estimated cash on hand upon emergence. 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.
For the complete recovery analysis, see our recovery report on NewPage, to be
published shortly after this release on RatingsDirect.
The stable rating outlook is supported by the NewPage's strong liquidity
position and significant debt and interest expense reduction post-emergence,
which we anticipated will 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, 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,
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- 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
Upgraded; Outlook Stable
Corporate Credit Rating B+/Stable/-- D/--/--
US$500 mil bank ln due 2018 BB
Recovery Rating 1