DBRS Morningstar Confirms Kruger Products L.P.’s Issuer Rating at BB and Senior Unsecured Notes Rating at B (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Kruger Products L.P.’s (KPLP or the Company) Issuer Rating at BB and its Senior Unsecured Notes (the Notes) rating at B (high), both with Stable trends. The recovery rating on the Notes remains RR6. Although the Company’s credit metrics weakened within the BB rating category, DBRS Morningstar confirmed the ratings as it expects sufficient top-line growth over the medium term to absorb the source of recent pressure on earnings. KPLP’s credit risk profile continues to be supported by its strong brands and leading market position in the Canadian tissue products market, stable demand, and significant barriers to entry. The Company’s ratings also continue to reflect intense competition, volatile input costs, and product/market concentration.

DBRS Morningstar bases its analysis on KPLP’s deconsolidated financial statements, which excludes subsidiaries that are unrestricted and non-recourse to the Company (i.e., the through-air-dried (TAD) projects).

KPLP’s earnings profile should slowly recover within the BB category over the medium term. DBRS Morningstar forecasts that revenue will increase in the low-single digits in the near to medium term on the back of volume growth. While the Company will continue to benefit from recent price increases in the near term, the highly competitive industry in which the Company operates as well as the strong bargaining power of major retailers may pressure margins. Furthermore, DBRS Morningstar expects the impact of rising input costs and higher costs associated with the Company’s planned reinvestment in its business to more than offset cost-saving benefits from the Operational Excellence program. As such, DBRS Morningstar forecasts that EBITDA will grow toward $90 million by F2021 from $84 million in the last 12 months ended September 30, 2019.

DBRS Morningstar also expects KPLP’s financial profile to recover within the BB rating category over the medium term, primarily supported by a slow recovery in earnings. KPLP’s operating cash flow and capital expenditures should remain relatively flat over the near to medium term in the range of approximately $62 million to $65 million and $30 million to $35 million per annum, respectively. The Company’s free cash flow (FCF) after cash dividend outlays should increase to approximately $20 million in F2020 with Kruger Inc.’s 100% Dividend Reinvestment Plan participation for that year. DBRS Morningstar expects KPLP to fund its remaining $62.5 million investment in the construction of the TAD plant in Sherbrooke (the TAD Sherbrooke project) with FCF and additional debt drawdowns in F2020. FCF will also be applied to mandatory debt repayment of approximately $5 million and $7 million by the end of F2020 and F2021, respectively. As such, DBRS Morningstar forecasts lease-adjusted debt-to-EBITDA to be 4.2 times (x) at the end of F2020 and improve to below 4.0x over the medium term. If leverage remains above 4.0x for a sustained period resulting from weaker-than-expected operating performance and/or more aggressive financial management, the ratings will be pressured. Although unlikely, a positive rating action could be influenced by a material and sustainable structural improvement in the tissue products industry.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Consumer Products Industry, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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