Moodys rates CascadesReuters
Moody's assigns Cascades Inc Ba1 debt rating
Tuesday January 14, 4:36 pm ET
Approximately $C1.2 Billion of Debt Securities Affected
NEW YORK, Jan 14 - Moody's Investors Service assigned a Ba1
long-term debt rating to Cascades Inc. The first-time rating
for Cascades Inc., a Canadian-based forest products company,
reflects its solid market share in a diverse range of paper and
packaging products, stable operating performance, integrated
operations, and good liquidity, offset by its exposure to
volatile raw material costs, moderately high financial leverage
and risks associated with potential future acquisitions.
The debt ratings of Cascades Boxboard Group (a wholly owned
subsidiary), B1 senior implied, were placed on review for
possible upgrade because of the exchange offer for its bonds.
Ratings Assigned
- Cascades Inc.
Sr Implied Rating: Ba1
Senior Secured bank credit facility: Baa3
Senior Unsecured notes: Ba1
Issuer Rating: Ba1
Ratings placed on review
- Cascades Boxboard Group
Senior Implied: B1
Senior Unsecured: B2
Issuer: B2
Cascades has significant market share in boxboard,
containerboard (through its 50% interest in Norampac) specialty
papers and tissue. The ratings consider the volatility of
certain raw material prices; pricing for its many of its key
linerboard and boxboard products is linked to OCC (old
corrugated containers) pricing. As a result, its operating
profit exhibits stability, as raw material cost changes are
generally passed along to its customers. However, sudden price
spikes are harder to pass through; this situation occurred in
2002, and could reoccur as OCC export demand from China has
risen in recent years. Other raw materials include virgin pulp,
and energy - mainly natural gas.
Cascades' exposure to OCC prices is partially offset by
Cascades' significant recycling operations that support its raw
material requirements, and by its integrated converting
operations; 53% of containerboard and 63% of tissue is
converted into finished products. The company's plan to
refinance most of its existing subsidiary debt with an offering
of a total of $US450mm in new senior unsecured notes and by
establishing a $C500mm bank credit facility, should result in
an improved and more transparent capital structure. Proceeds of
the notes and drawings on the facility will be used to
refinance all of Cascades' and its subsidiaries' credit
facilities. Of the $US450mm, about $US125mm will be issued in
an exchange offer for the bonds of Cascades Boxboard (a
100%-owned subsidiary).
The ratings for the bank credit facility reflect the
security package, which includes accounts receivable,
inventories and three mills; the total book value of the
secured assets is about $C900 million. The covenants are based
on a restricted group of subsidiaries, which excludes Norampac
(debt of Norampac is non-recourse to Cascades) and other joint
ventures. Financial covenants are: Debt/Cap < 60% in 2003,
falling to 57.5% in 2004 and 55% in 2005 (current is 49.8%);
EBITDA/interest greater than 2.5x (current is 6.0). At
September 30, 2002, on an LTM basis Cascades debt leverage was
2.9, on a fully consolidated basis and EBITDA/interest was 5.8
times. On completion of the refinancing, Moody's considers
Cascades' financial liquidity to be acceptable, consisting
mainly of its new $C500 mm, 4-year bank credit facility;
$C327mm is expected to be available post refinancing.
Debt maturities in the near term are modest; $C28mm over
next 3 years. Liquidity is also supported by cash balances of
about $C45 mm. Pension plans are primarily defined contribution
with a small amount defined benefit. The defined benefit plans
are expected to be slightly overfunded at year-end 2002 and no
cash funding is expected to be required in 2003. The ratings
consider the likelihood that Cascades will continue to grow
through a combination of capital investment and acquisitions,
including buyouts of joint venture partners. In the last three
years, the company (including Norampac) has spent about $C320
million on acquisitions, primarily purchasing tissue and
containerboard (through Norampac) assets. Further, Cascades'
containerboard assets are held in Norampac (rated Ba2), a 50/50
joint venture with Domtar (Baa3).
Moody's considers Cascades to be a logical owner of these
assets. The ownership agreement includes a right of first
refusal for a third-party sale, and a "shot-gun" provision in
the event one party makes an offer to buy out the other.
Cascades' principal operations are located in Canada, the U.S.
and Europe, with sales going to the U.S. (40%), Canada (45%)
and Europe/others (15%). The packaging division (57% of sales,
59% of EBITDA) comprises its boxboard, specialty packaging, and
containerboard (Norampac) operations. Key products include 1)
boxboard and folding cartons, and 2) containerboard and
corrugated packaging. In tissue (20% of sales, 32% of EBITDA),
products include a range of facial, bathroom and household
paper products, many of which are sold as private label
products. In fine papers (23% of sales, 9% of EBITDA), products
include a variety of specialized products. The outlook for
Cascades' debt ratings is stable.
Higher ratings are possible if management refrains from
acquisitions, maintains good liquidity, removes security
feature of credit facility, and economy recovers. Lower ratings
are possible if Cascades' acquisition pace accelerates, the
buyout of Norampac (50%-owned) occurs with an aggressive
financing plan, and/or economy deteriorates.
Cascades is a Montreal-based, diversified forest products
company, producing linerboard, containerboard, packaging
products, tissue and fine papers. Revenues in 2001 totaled
about $C3.0 billion.
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Good luck to all