DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes (the Notes) rating of Kruger Packaging Holdings L.P. (KPH or the Company) at BB (high) with Stable trends. The rating confirmations reflect KPH’s solid operating performance during the Coronavirus Disease (COVID-19) pandemic, despite the disruptions to supply chain and end markets. The ratings continue to be supported by (1) KPH's exposure to the less volatile paper packaging industry relative to other subsectors of forest products industry; (2) stable, nondiscretionary end-market customers, including in food & beverages and nondurable consumer products segments; and (3) low-cost, efficient operations. The ratings are additionally supported by a conservative financial policy and low leverage for the rating category. However, the ratings are constrained by the Company’s lack of size and market position in the North American containerboard segment, lack of diversification in the broader paper and forest products industry, exposure to volatile input costs, and relatively low (albeit increasing) forward integration into its corrugated box plants. The Stable trends reflect DBRS Morningstar’s expectation that KPH's key credit metrics will continue to support the overall ratings.
KPH's earnings and cash flow increased in 2021 compared with 2020 because of favourable pricing environment across product segments, including containerboard and pulp products. The Company's key credit metrics also improved because of higher earnings and lower debt levels. KPH generated 81% and 84% of revenue and EBITDA, respectively, in 2021 from its Containerboard, Paperboard & Boxes segment, with the remainder from the Paper & Pulp Products segment. EBITDA from Paper & Pulp Products segment improved in 2021 as a result of strong prices and low chip costs. However, given that North American demand for newsprint has been in secular decline for many years now, the Company has appropriately scaled down operations in this segment over the last several years.
DBRS Morningstar expects KPH's 2022 EBITDA to increase year over year as a result of projected higher average containerboard prices, partly offset by expected higher old corrugated containers costs and inflationary pressure on operating costs. However, DBRS Morningstar expects containerboard prices to moderate in 2023 as a result of planned incremental containerboard capacity additions of approximately 2,800 thousand metric tons (TMT) to the North American market.
KPH recently announced the construction of a new U.S. greenfield box plant in Elizabethtown, Kentucky. The expected total capital cost for the project is USD 142 million, excluding startup capital. The project is projected to begin operations in 2022 and reach full capacity by end of 2026. At maturity, the new box plant is anticipated to increase forward integration for KPH's linerboard production from 42% to about 70%.
DBRS Morningstar estimates adjusted debt-to-EBITDA increasing to about 1.8 times (x) in 2022 compared with 1.5x in 2021 because of additional project debt incurred for capex related to the planned new box plant partly offset by expected higher earnings and periodic repayments of the Investissement Québec loan and equipment loans.
DBRS Morningstar expects KPH to continue to benefit from its relatively stable end markets in the containerboard segment and its conservative financial policy for the rating category. DBRS Morningstar believes a negative rating action is unlikely in the near term. DBRS Morningstar could consider a positive rating action if there is a substantial improvement in the business risk profile.
There was no environmental, social, or governance factors or consideration with a significant or relevant impact on the credit ratings.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Forest Products Industry (March 11, 2022; https://www.dbrsmorningstar.com/research/393614), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 19, 2021; https://www.dbrsmorningstar.com/research/383238), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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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.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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