DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes rating of Kruger Packaging Holdings L.P. (KPH or the Company) at BB (high) with Stable trends. The rating confirmations reflect KPH’s consistent and demonstrated operating performance during the period of economic slowdown following the Coronavirus Disease (COVID-19) recovery phase. The ratings continue to be supported by (1) KPH's exposure to the less volatile paper packaging industry relative to other subsectors of the forest products industry; (2) stable, nondiscretionary end-market customers, including in food and beverages and nondurable consumer products; and (3) low-cost, efficient operations. The ratings are supported by a conservative financial policy and low leverage for the current 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 2022 compared with 2021 because of a favourable pricing environment across product segments, including containerboard and pulp products, and lower raw material costs for the containerboard segment. The Company's key credit metrics also improved because of higher earnings and cash flows. KPH generated 78% and 73% of revenue and EBITDA, respectively, in 2022 from its Containerboard, Paperboard & Boxes segment, with the remainder from the Paper & Pulp Products segment. EBITDA from the Paper & Pulp Products segment improved in 2022 because of strong price realizations. 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 2023 EBITDA to decline year over year because of an anticipated decline in containerboard prices, coupled with higher expected old corrugated container (OCC) costs.
KPH's new greenfield box plant in Elizabethtown, Kentucky, became operational in 2022. The total capital cost for the project was USD 142 million, excluding start-up capital. The box plant will likely reach full capacity by the end of 2026, and KPH expects the new plant to increase the forward integration for its linerboard production to about 70% by 2026 from 46% currently.
DBRS Morningstar expects containerboard prices to decline in 2023 compared with average 2022 prices as a result of weak economic activity. Furthermore, the input costs in the form of OCC prices are also likely to increase as a result of inflationary pressures. As a result, DBRS Morningstar expects the adjusted debt-to-EBITDA ratio to increase to about 2.1 times (x) in 2023 compared with 1.7x in 2022.
DBRS Morningstar expects KPH to continue to benefit from its 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 unless there is a significant deterioration in the overall financial risk profile. DBRS Morningstar could consider a positive rating action if there is a substantial improvement in the business risk profile.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, or governance factors that had a significant or relevant effect on the credit analysis.
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/396929 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Forest Products Industry (March 28, 2023) https://www.dbrsmorningstar.com/research/411584
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
-- DBRS Morningstar Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (September 1, 2022) https://www.dbrsmorningstar.com/research/402218
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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