Our baseline scenario for 2012 assumes that Clearwater’s revenue growth moderates and cost pressures ease. We also expect little change in adjusted debt ($733 million on March 31, 2012, including lease and pension adjustments) and for 2012 adjusted EBITDA and leverage to hold relatively steady near $220 million and 3.3x EBITDA, respectively. These measures are in a range supportive of our significant financial risk assessment.
Key assumptions in our 2012 baseline scenario include:
-- A gradual economic recovery and growing market penetration for private-label tissue products spur demand for Clearwater’s consumer products segment;
-- A 5% increase in tissue shipments and a 2.5% price increase on certain products;
-- Paperboard shipments and prices remain relatively steady;
-- Eliminated lumber sales with the sale of Clearwater’s Lewiston, Idaho mill, and eliminated pulp revenues as more pulp is consumed internally and accounted for as a cost of goods sold; and
-- Adjusted gross margins (16% in 2011) hold steady as input cost inflation eases.
Our assessment of Clearwater’s business risk profile as fair acknowledges the company’s leading market position in the private label tissue niche, which we believe will prove less cyclical relative to its pulp and paperboard segment. However, Clearwater retains a mid-tier market position overall as the sixth-largest North American tissue manufacturer and fifth-largest manufacturer of bleached paperboard. Clearwater’s customer concentration also remains high, with three national grocery chains (including Kroger Co. ) accounting for roughly one-quarter of all sales.
We view Clearwater as having adequate liquidity in accordance with our criteria based on the following expectations:
-- Sources of liquidity will exceed uses by more than 1.2x over the next 12 months;
-- Sources of liquidity will exceed uses even if our assumed EBITDA declined by 15%; and
-- Availability under a $125 million secured revolving credit facility will not fall below 20% (which would trigger a springing fixed-charge covenant).
Sources of liquidity as of March 31, 2012, include $50 million in cash and short-term investments and $117 million available under its $125 million secured revolving credit facility (net of outstanding letters of credit). The credit facility matures in either September 2016, or March 2016 if the $150 million 10.625% senior unsecured notes (due June 2016) are not retired early. The credit facility is governed by a springing 1x fixed-charge coverage covenant only in the event of a default or if availability drops below 20%. Fixed-charge coverage was 2.9x as of March 31, 2012, but we do not expect this covenant to be in effect given our conjecture that credit facility usage will be modest next year.
We expect Clearwater to generate about $160 million of funds from operation in 2012, but post a modest operating cash flow deficit, after funding the remaining $185 million to $205 million in costs arising from the firm’s expansion of its Shelby, N.C. tissue paper plant. Other uses of capital include $19 million remaining under a $30 million stock repurchase authorization. Clearwater does not face a debt maturity until 2016, when both its credit facility and the $150 million 10.625% senior unsecured notes are due.
For the complete recovery analysis, see our recovery report on Clearwater Paper Corp., published Oct. 28, 2011, on RatingsDirect.
The stable outlook reflects our expectation that Clearwater’s leverage will remain in the 3x to 4x EBITDA range in 2012, based on our assumption for modest revenue growth and stable, but elevated, input costs. Our rating outlook also assumes that Clearwater maintains an adequate liquidity position after funding capital expenditures related to the expansion of its tissue manufacturing capacity.
An upgrade is unlikely over the next 12 months, given our view that EBITDA will not improve meaningfully and debt levels will remain flat. We would take a positive rating action in a year or two if EBITDA grows more quickly than we currently anticipate, such that key credit measures are more clearly reflective of an intermediate financial risk profile (debt to EBITDA in the 2x to3x range, for example). This scenario could happen if there are strong and permanent tissue price increases, lower-than-currently anticipated input costs, or much stronger-than-expected synergies relating to the Cellu Tissue acquisition.
We would lower our rating if leverage increased and remained above 4.0x for a sustained period. This could occur if revenues dropped 10%, perhaps related to the loss of a large supermarket customer, and adjusted gross margins contracted to below 14% because of further input cost appreciation.
Related Criteria And Research
-- Industry Economic And Ratings Outlook: Stiffer Headwinds Are On The Horizon For Some U.S. Natural Resources Companies, Though Most Outlooks Hold Stable For Now, July 13, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008