Some US$18 bln of debt held by Graeme Hart's packaging group Reynolds Group downgraded to B3, lowest of Moody's 'highly speculative' ratings

Some US$18 bln of debt held by Graeme Hart's packaging group Reynolds Group downgraded to B3, lowest of Moody's 'highly speculative' ratings
Graeme Hart

Moody's Investors Service has downgraded its already "highly speculative," or junk, credit rating on Graeme Hart's Reynolds Group Holdings, saying the packaging group's free cash flow remains "minimal" relative to debt.

The downgrade to B3, with a stable outlook, from B2 is the equivalent of a Standard & Poor's or Fitch Ratings B- rating. It's regarded as "highly speculative" and drops the Auckland-based Reynolds' to Moody's lowest rating above those starting with a C,  its "substantial risks" and "extremely speculative" ratings. Below those are only ratings issued to companies in default.

The rating affects about US$18 billion (about NZ$22.5 billion) of debt, comprised of outstanding principal borrowings and overdrafts. Reynolds' latest financial statements show the businesses equity deficit narrowed to US$131 million at June 30 from US$177 million at December 31 last year, with total assets of US$22.3 billion versus total liabilities of US$22.5 billion. The accounts say Reynolds met all its financial covenants.

Reynolds lost US$55 million in the three months to June 30 , versus a loss of US$50 million in the same period of last year, but recorded a profit of US$8 million for the six months to June, versus a loss of US$104 million in the same period of last year. Half-year revenue rose US$1.7 billion, or 32%, to US$6.9 billion. Net financial expenses rose US$129 million, or 24%, to US$667 million.

Meanwhile, Moody's says the downgrade of its rating reflects pro-forma credit metrics that are below forecast levels and an expectation future improvement may proceed more slowly than originally projected.

"Pro-forma debt to ebitda (earnings before interest, tax, depreciation and amortisation) is above 6.5 times and debt to revenue above 120% while free cash flow remains minimal relative to debt. Reynolds Group  has been negatively impacted by the soft economy, production inefficiencies at Graham Packaging and competition, and one or more of these factors is expected to continue to drag on operating performance over the intermediate term," says Moody's.

As outlined in the (Moody's) press release dated August 1, 2011, Reynolds' credit metrics were stressed from a series of debt financed acquisitions and had little room for any negative variance in operating performance."

'Acquisitiveness/financial aggressiveness' started with Carter Holt

The media shy Hart, who Forbes has estimated is worth US$5.7 billion, started assembling his packaging empire after completing his NZ$3.3 billion Carter Holt Harvey acquisition and delisting that company from the New Zealand stock exchange in 2006. Reynolds' largely US and European based businesses now include SIG, Reynolds Consumer Packaging, Evergreen, Closures, Pactiv and Graham Packaging.

SIG is a maker of aseptic beverage carton packaging (long life cartons) that allows the likes of juice, milk, soups and sauces to be stored for extended periods without refrigeration, Reynolds Consumer Products is the dominant US maker of foil, wraps and bags used for food storage and preparation, and Closures is the leading global provider of plastic bottle caps used for soft drinks and bottled water. Pactiv's products include Hefty garbage bags.

Moody's says Reynolds' B3 rating reflects its weak pro-forma credit metrics, integration risk and limited operating history for the combined entity. The rating and outlook also reflect the company's "lengthy" raw
material cost pass-through provisions, concentration of sales within certain segments and "acquisitiveness/financial aggressiveness."

"Additionally, the company has a complex capital and organisational structure and is owned by a single individual. Reynolds is still integrating a large acquisition (Graham Packaging in September 2011) and remains acquisitive. The company has only been operating as a combined entity since 2007 and approximately 20% of pro-forma revenues are from Graham."

However, Moody's said strengths in Reynolds' profile include its strong brands and market positions in certain segments, scale and high percentage of blue-chip customers.

"Many of Reynolds' businesses had a history of strong execution and innovation prior to their acquisition and much of the existing management teams were retained. Scale, as measured by revenue, is significant for the industry and helps Reynolds lower its raw material costs. The company also has high exposure to food and beverage packaging," Moody's adds. 

The credit rating agency says Reynolds currently has "adequate" liquidity with about US$1.2 billion of cash on hand.

The stable rating outlook reflects an expectation credit metrics will improve modestly, but remain within the rating category. But Moody's says the rating could be downgraded if there was a deterioration in credit
metrics, liquidity or the competitive and operating environment, or if Reynolds makes any significant acquisition.

"Specifically, the ratings could be downgraded if debt to ebitda increases to above 7.0 times, ebit (earnings before interest and tax) to interest expense declined below 1.0 time, and free cash flow to debt remained below 1.0%."

In contrast the rating could be upgraded if Reynolds "sustainably" improves its credit metrics within the context of a stable operating and competitive environment, whilst also maintaining adequate liquidity including "ample" cushion under financial covenants.

"Specifically, Reynolds would need to improve debt to ebitda to below 6.3 times, ebit to interest expense to at least 1.4 times and free cash flow to debt to above 3.5% while maintaining the ebit margin in the high single digits," Moody's says.

Below is a list of Moody's ratings actions on Reynolds' various individual debt instruments

-Downgraded EUR 80M Senior Secured Revolving Credit Facility due
11/5/2014 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)

-Downgraded US $120M Senior Secured Revolving Credit Facility due
11/5/2014 to B1 (LGD 2, 27%) from Ba3 (LGD 2, 27%)

-Downgraded US $2,000M Senior Secured Term Loan due 8/9/2018 to B1 (LGD 2,
27%) from Ba3 (LGD 2, 27%)

-Downgraded US $2,325M Senior Secured Term Loan due 2/9/2018 to B1 (LGD 2,
27%) from Ba3 (LGD 2, 27%)

-Downgraded EUR 250M Senior Secured Term Loan due 2/9/2018 to B1 (LGD 2,
27%) from Ba3 (LGD 2, 27%)

Reynolds Group Issuer Inc., Reynolds Group Issuer LLC, Reynolds Group Issuer
(Luxembourg) S.A.,

-Downgraded US $1,500M 7.875% Senior Secured Notes due 8/15/2019 to B1 (LGD
2, 27%) from Ba3 (LGD 2, 27%)

-Downgraded US $1,125M 7.750% Senior Secured Notes due 10/15/2016 to B1 (LGD
2, 27%) from Ba3 (LGD 2, 27%)

-Downgraded EUR 450M 7.750% Senior Secured Notes due 10/15/2016 to B1 (LGD
2, 27%) from Ba3 (LGD 2, 27%)

-Downgraded US $1,500M 7.125% Senior Secured Notes due 04/15/2019 to B1 (LGD
2, 27%) from Ba3 (LGD 2, 27%)

-Downgraded US $1,000M 6.875% Senior Secured Notes due 02/15/2021 to B1 (LGD
2, 27%) from Ba3 (LGD 2, 27%)

-Downgraded US $2,241.033M 9.875% Senior Unsecured Notes due 8/15/2019 to
Caa2 (LGD 5, 79%) from Caa1 (LGD 5, 79%)

-Downgraded US $8.95M 9.875% Senior Unsecured Notes due 8/15/2019 to Caa2
(LGD 5, 79%) from Caa1 (LGD 5, 79%)

-Downgraded US $1,000M 8.500% Senior Unsecured Notes due 05/15/2018 to
Caa2 (LGD 5, 79%) from Caa1 (LGD 5, 79%)

-Downgraded US $1,500M 9.000% Senior Unsecured Notes due 04/15/2019 to
Caa2 (LGD 5, 79%) from Caa1 (LGD 5, 79%)

-Downgraded US $1,000M 8.250% Senior Unsecured Notes due 02/15/2021 to
Caa2 (LGD 5, 79%) from Caa1 (LGD 5, 79%)

Beverage Packaging Holdings (Lux) II S.A.

-Downgraded EUR 480M 8.000% Senior Notes due 12/15/2016 to Caa2 (LGD 5,
79%) from Caa1 (LGD 5, 79%)

-Downgraded EUR 420M 9.5% Sr. Subordinated Notes due 06/15/2017 to Caa2 (LGD
6, 96%) from Caa1 (LGD 6, 96%)

Pactiv Corporation

-Downgraded US $300M 8.125% Bonds due 06/15/2017 to Caa2 (LGD 6, 94%) from
Caa1 (LGD 6, 94%)

-Downgraded US $250M 6.400% Notes (approximately $16M outstanding) due
01/15/2018 to Caa2 (LGD 6, 94%) from Caa1 (LGD 6, 94%)

-Downgraded US $276.79M 7.950% Bonds due 12/15/2025 to Caa2 (LGD 6, 94%)
from Caa1 (LGD 6, 94%)

-Downgraded US $200M 8.375% Notes due 04/15/2027 to Caa2 (LGD 6, 94%) from
Caa1 (LGD 6, 94%)

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1.4x Interest Coverage is truely eye watering. Either this business grows exponentially, hocks of some non-core assets or the equity is not worth a dam. Stikes at Carter Holt Harvey Aussie can't help. 
What else does Grazer still own any of the Gov't Print, Burns Phillip assets left? He's been trying to dump Placemaker since day one...
Lest he's got that monster Ulysess.