S&P models default of Hart's Reynolds Group; sees junk bond investors losing 90% plus in any collapse

By Gareth Vaughan Standard & Poor's says if Graeme Hart's Reynolds Group Holdings hit the rocks investors in the US$1 billion (NZ$1.37 billion) worth of junk bonds the global packaging group issued last week would face a "negligible" recovery of between zero and 10%. The international credit rating agency has issued a B- speculative or junk credit rating and recovery rating of 6 to Reynolds' new eight year, senior unsecured notes. S&P says in a hypothetical scenario Reynolds would default in 2014. This payment default would result from a combination of generally high leverage, debt-funded acquisitions, and a margin squeeze arising from macroeconomic weakness. On top of this would be consistently weaker revenue generation across all Reynolds' divisions and rising raw material costs. "Furthermore we assume that restructuring, operating and capital investments will not deliver the anticipated cost benefits. In addition, we assume a rise in marketing expenditure in an attempt to stimulate sales," S&P London and Frankfurt-based analysts Hina Shoeb and Izabela Listowska write. At the point of hypothetical default S&P suggests Reynolds would be valued at about €2.8 billion (NZ$5.1 billion) with earnings before interest, tax, depreciation and amortisation of €455 million compared to 2009's €665 million. S&P says Reynolds, consisting of the world’s second biggest maker of long life beverage carton packaging SIG, the dominant US maker of foil, wraps and bags used for food storage and preparation Reynolds Consumer, and a leading global provider of plastic bottle caps used for soft drinks and bottled water Closures, would be sold as a going concern "along the path" to default. Reynolds, which S&P rates B+, already had debt of about €3 billion at December 31, 2009. The group made the US$1 billion notes issue, in the US private placement market to help fund further consolidation of Hart's packaging interests. Reynolds is buying two other Hart businesses - Evergreen Packaging in the US and Carter Holt Harvey's Whakatane Paper Mill. Reynolds is also using US$800 million of bank loans to help fund this deal. On the bright side, in his latest debt raising Hart appears to have secured long-term debt funding at the lowest rate for highly geared companies in the last 10 years. This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.