With its credit rating already five notches below investment grade, Graeme Hart’s Reynolds Group Holdings faces a potential downgrade from Moody’s Investors Service in the wake of its heavily leveraged US$6 billion (NZ$8.4 billion) acquisition of US rubbish bag maker Pactiv.
Moody’s said its B2 Corporate Family Rating on Reynolds had been placed on review for possible downgrade alongside ratings on existing notes and bank credit facilities, which affects about 4.5 billion euros (NZ$8.1 billion) worth of rated debt.
The rating review comes after Reynolds, the umbrella company of Hart’s global packaging empire, announced plans to buy Pactiv for about US$6 billion. It will help fund the purchase with about US$5 billion of debt, provided through Credit Suisse, HSBC and ANZ. Reynolds, whose packaging empire extends from Whakatane to Nepal to South America and Switzerland, already had about NZ$8 billion of debt before announcing the acquisition of Pactiv, the Illinois-based maker of Hefty rubbish bags.
“Given the large size of the acquired operation, challenges to realize synergy benefits, and the heavily debt weighted financing Moody's is concerned that the group's leverage ratios may fall below levels required for the current B2 rating for an extended period of time,” Moody’s analyst Wolfgang Draack said.
“The rating review will focus in particular on (i) the financing structure of the acquisition and implications on leverage ratios, (ii) the benefits of the acquisition on the group's overall business profile and (iii) the combined group's de-leveraging prospects.”
Draack said Reynolds’ ratings could be downgraded, if it was unable to generate positive free cash flows, and if leverage remains around 6x debt/earnings before interest, tax, depreciation and amortisation (ebitda) for a sustained period.
“Furthermore, a tightening of financial covenant headroom without an appropriate reset to levels accommodating the transaction would put pressure on the rating. These aspects, however, may be balanced by potential benefits from the contemplated acquisition such as synergies, increased diversification or higher purchasing power.”
Reynolds is a leading global maker and supplier of food and beverage packaging and consumer storage products. Based on pro forma 2009 figures, Reynolds generated 3.8 billion euros of sales in 2009.
The group already consists of SIG, the world’s second biggest maker of aseptic beverage carton packaging (which allows the likes of juice, milk, soups and sauces to be stored for extended periods without refrigeration) with 19% market share, Reynolds Consumer, the dominant US maker of foil, wraps and bags used for food storage and preparation, Closures, a leading global provider of plastic bottle caps used for soft drinks and bottled water, and Evergreen Packaging Group which was formed through Hart’s acquisition of the United States domiciled Evergreen Packaging and Blue Ridge Paper Products in 2007.
Hart sold US$1 billion worth of junk bonds, or senior unsecured notes, in the United States private placement market in late April to help fund the purchase by Reynolds of Evergreen as he consolidated his packaging interests. Hart’s timing for that deal appeared to secure long-term debt funding at the lowest rate for highly geared companies in 10 years.
Reynolds most recent quarterly results saw it post a 47.6 million euros loss for the three months to March despite increasing revenue by 10 million euros to 685.3 million euros. In the March quarter, increased raw material costs and a 107%, or 60.6 million euros rise in financial expenses driven by higher foreign exchange losses and increased interest payments on the group’s debt, saw financial expenses climb to 117.2 million euros. The group also said its Reynolds Consumer arm would exit unprofitable markets and product lines.
In March Forbes Magazine ranked Hart as Australasia's richest man for the second straight year, estimating his fortune at US$5.3 billion.