December 11, 2012 / 5:30 PM / in 5 years

TEXDT-S&P affirms Graphic Packaging International ratings

     -- U.S.-based Graphic Packaging announced two acquisitions to be funded 
from revolver borrowings and plans to enter into an incremental term loan 
facility to fund a share repurchase.
     -- We are affirming our ratings on Graphic Packaging, including the 'BB+' 
corporate credit rating.
     -- We are assigning our 'BBB' issue-level rating to the company's 
proposed $300 million senior secured term loan.
     -- The stable outlook reflects our expectation that the company will 
continue to generate relatively steady earnings and sizeable free cash flow 
resulting in modest debt reduction in 2013. 

Rating Action
On Dec. 11, 2012, Standard & Poor's Ratings Services affirmed its ratings, 
including the 'BB+' corporate rating, on Atlanta, Ga.-based Graphic Packaging 
International Inc. (Graphic Packaging). The rating outlook is stable.

We also assigned our 'BBB' issue-level ratings to the company's proposed $300 
million senior secured incremental term loan. The recovery rating is '1', 
reflecting our expectation that lenders can expect to achieve very high (90% 
to 100%) recovery in the event of a payment default.

Proceeds from the proposed term loan are to be used to repurchase and cancel 
stock of Graphic Packaging Holding Co.

The ratings affirmation reflects our expectation that Graphic Packaging will 
be able to maintain its "significant" financial risk profile despite a modest 
increase in debt following the announced acquisitions and proposed share 
repurchase. Specifically, we forecast annual free cash flow in excess of $200 
million in 2013 and 2014 and leverage declining to 3x over this period from 
about 4x pro forma following the proposed transactions. In addition, we view 
the acquisitions, share repurchase, and incremental debt as not deviating 
substantially from management's stated financial policy, which we view as 
consistent with a significant financial risk profile. 

The ratings on Graphic Packaging reflect the combination of what we consider 
to be its "satisfactory" business risk and significant financial risk 
profiles. We expect further leverage reduction from free cash flow to result 
in leverage in the mid-3x area and funds from operations (FFO) of about 20% at 
the end of 2013. We view these credit metrics as consistent with the rating 
and our assessment of the company's significant financial risk profile. Our 
satisfactory business risk profile reflects our view of the company's 
long-term customer relationships, position as the largest North American 
producer of folding cartons with 32% market share, and its value-added product 
mix. The ratings also incorporate our expectations for no additional large 
debt-financed acquisitions, share repurchases, or dividends to its 
concentrated shareholder base.

Under our baseline scenario, we believe Graphic Packaging's 2012 EBITDA could 
increase to $670 million or more from the $620 million it generated in 2011. 
For 2013, we estimate EBITDA could approach $700 million based on incremental 
acquisition-related EBITDA and benefits from ongoing productivity improvements 
and cost reductions of $60 million to $80 million per year. Other key 
assumptions to our EBITDA forecast include:

     -- Limited demand improvement for paperboard packaging products, based on 
a gradual economic recovery, with annual U.S. real GDP growth of 2.3% in 2013.
     -- Modestly lower contractual selling prices reflecting 2012's raw 
material deflation.
     -- Modest cost inflation (for wood, petroleum-based materials, and 
energy) in 2013.

A key risk to our forecast is a weaker U.S. economic recovery, which we expect 
to hurt demand, albeit to a lesser extent than for other forest products 
companies, given Graphic Packaging's relatively stable food and beverage end 
markets. Other risks include lower profitability that may temporarily arise 
from greater-than-expected raw material input cost inflation that is not 
offset by price increases. We view this risk to be largely mitigated by the 
company's customer supply agreements that contain inflation recovery 

As of Sept. 30, 2012, pro forma total debt (including $300 million of proposed 
incremental term loans, $150 million of acquisition-related revolver 
borrowings, and adjustments for pension liabilities and operating leases) was 
$2.8 billion, compared with $2.7 billion at the end of 2011. Based on our 
EBITDA assumptions, we expect the company to generate $200 million or more of 
annual free cash flow in 2013 and 2014, which we believe it could use to 
further reduce debt. As a result, we believe leverage could drop to the mid-3x 
area by the end of 2013, compared with just over 4x (including the incremental 
term loan and revolver borrowings) for the trailing 12-months ended Sept. 30, 
2012. In addition, we believe FFO to debt is likely to be about 20% by the end 
of 2013 and further improve thereafter.

Graphic Packaging manufactures paperboard, most of which it uses internally to 
produce beverage carriers or folding cartons for food, household goods, and 
other consumer products that tend to be recession-resistant. As a result, the 
paperboard segment (84% of sales) fared relatively well during the most recent 
U.S. recession, with revenue declining by less than 5%. Its relatively 
lower-margin multi-wall bag and specialty plastics packaging business (16% of 
sales) was combined with the assets of two other entities to vertically 
integrate the business, realize meaningful synergies, and improve overall 

Our view of Graphic Packaging's management and governance is "fair".

Our assessment of Graphic Packaging's "strong" liquidity profile is based on 
the following expectations:

     -- Sources of liquidity (including forecasted FFO, cash balances, and 
availability on its revolver) will exceed uses by 1.5x or more over the next 
     -- Liquidity sources will continue to exceed uses, even if forecasted 
EBITDA declines by 30%.
     -- Sufficient covenant headroom exists for forecasted EBITDA to decline 
by 30% without the company breaching coverage tests. Financial covenants 
governing its credit agreement include a maximum leverage ratio of 4.75x and 
minimum interest coverage of 3x. 
     -- The leverage covenant steps down to 4.5x beginning March 31, 2013, and 
to 4.25x beginning March 31, 2014.

As of Sept. 30, 2012, and prior to the acquisitions, cash balances were $36.5 
million and $675.4 million was available under the company's $1.0 billion 
revolving credit facility due March 2017 and international revolving credit 
facilities. Based on our current operating assumptions and annual capital 
expenditures of $190 million to $210 million, we expect annual free cash flow 
to be $200 million or more in each of the next two years. The company doesn't 
currently pay a dividend, and our ratings incorporate our expectation that any 
additional acquisition activity or potential dividends or share repurchases 
would be financed in a manner consistent with our assessment of the company's 
significant financial risk profile.

Graphic Packaging does not have any significant debt maturities until 2017. 
Term loan amortization under its credit agreement is 5% in the first two 
years, 7.5% in year three, and 10% thereafter.

Recovery analysis
We rate Graphic Packaging's senior secured debt 'BBB' (two notches above the 
corporate credit rating) with a '1' recovery rating. The '1' recovery rating 
reflects our view that lenders would experience very high (90% to 100%) 
recovery in the event of a payment default. We rate the company's senior notes 
'BB+' (the same as the corporate credit rating) with a '3' recovery rating. 
The '3' recovery rating reflects our view that lenders would experience 
meaningful (50% to 70%) recovery in the event of a payment default. For the 
recovery analysis, see the report on Graphic Packaging to be published shortly 
after this report on RatingsDirect.

The rating outlook is stable. We expect Graphic Packaging to continue to 
generate relatively steady earnings and sizeable free cash flow and remain 
committed to modest debt reduction, so that credit measures remain in line 
with the ratings. Based on our EBITDA projections, we expect free cash flow 
generation to be $200 million or more in each of the next two years, leverage 
to approximate 3.5x, and FFO to debt to be about 20% by the end of 2013. We 
view these credit measures as consistent with the 'BB+' corporate credit 
rating, given the company's satisfactory business risk profile.

For a higher rating, our assessment of Graphic Packaging's financial risk 
would need to improve to "intermediate" from "significant," based on its 
satisfactory business risk profile. This could occur if leverage was sustained 
at or below 3x and FFO to debt above 30% and we viewed the company's financial 
policy as consistent with a low-investment-grade rating. For this to occur, 
earnings would have to improve more than 15% from our 2013 EBITDA forecast and 
stay at that level, which we view as unlikely given our cautious economic 
outlook. In addition, for a higher rating we would have to anticipate that the 
company would finance any potential dividends, share repurchases or 
acquisitions such that credit metrics remained consistent with an intermediate 

We could lower the rating if free cash flow were to significantly decline or 
be used for other activities, such as excessive shareholder rewards, large 
acquisitions, or initiatives, causing leverage to remain above 4x, with FFO to 
debt in the mid-teen percentage area. This could occur with minimal debt 
reduction and if EBITDA were to decline 15% from our 2013 forecast and stay at 
that level.

Related Criteria And Research
     -- Top 10 Investor Questions For 2013: Global Forest Products, Dec. 5, 
     -- Management And Governance Credit Factors For Corporate Entities And 
Insurers, Nov. 13, 2012 
     -- 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
Ratings List
Ratings Affirmed

Graphic Packaging International Inc.
 Corporate Credit Rating                            BB+/Stable/-- 
 Senior Secured                                     BBB      
   Recovery Rating                                  1          
 Senior Unsecured                                   BB+         
   Recovery Rating                                  3

New Ratings
Graphic Packaging International Inc.
 Senior Secured
  US$300 mil term incremental A-2 bank ln due 2017  BBB        
   Recovery Rating                                  1          

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 
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