(Toronto, 08 Sep 2016) Moody’s Investors Service, (Moody’s) downgraded Resolute Forest Product Inc’s (Resolute) senior unsecured notes due 2023 to B1 from Ba3 and raised the speculative-grade liquidity rating to SGL-1 (very good liquidity) from SGL-2 (good liquidity). The company’s existing ratings, including the Ba3 Corporate Family Rating and Ba3-PD Probability of Default Rating were affirmed. The outlook remains stable.
“The downgrade of the senior unsecured notes resulted from Resolute’s announcement to add $185 million of additional secured debt which would rank ahead of the senior unsecured notes in the capital structure,” said Ed Sustar, Senior Vice President with Moody’s. “The liquidity rating was raised as the additional credit facilities will provide Resolute access to additional liquidity to cover higher than normal near term capital expenditures “, added Sustar.
RATINGS RATIONALE
The raising of Resolute’s speculative-grade liquidity rating to SGL-1 reflects Moody’s view that the company will have about $535 million of liquidity to fund cash requirements of about $130 million over the next 12 months. The company has about $40 million of cash (as of 30 June 2016), availability under its $600 million asset-based revolving credit facility that matures in May 2020 and a new $185 million credit facility. These sources of liquidity are more than sufficient to cover the higher than normal near term capital expenditures related to the completion of the company’s $270 million construction of a new tissue paper machine and three converting lines at its Calhoun, Tennessee pulp and paper mill. Resolute has no near term debt maturities, and its core debt (senior unsecured notes) does not mature until 2023.
Resolute’s Ba3 CFR reflects the company’s strong market positions in paper, pulp and lumber, integrated product diversity, strong liquidity and favorable cost position for most of the products that it manufactures. The rating is tempered by high adjusted leverage (6x as of June 2016) given the company’s significant unfunded pension liabilities and the secular decline of newsprint and specialty papers, which represents about 60% of the company’s revenue. This paper decline is somewhat offset by the recovery of the company’s wood products segment as the US housing market strengthens and the diversification provided by the company’s market pulp, wood products and growing tissue business.
The stable outlook reflects our expectation that weaker results from Resolute’s paper business will be partially offset by higher lumber and market pulp sales from the full ramp-up of completed capacity expansion projects and from earnings from the company’s growing tissue business.
An upgrade may be warranted if the company continues to diversify away from the declining paper market, with adjusted debt to EBITDA approaching 3x on a sustained basis (6x as of June 2016), while maintaining strong liquidity. Resolute’s ratings could face downward ratings pressure if the company’s liquidity position deteriorates or if adjusted Debt to EBITDA exceeds 5.5x for a sustained period of time.
The principal methodology used in these ratings was Global Paper and Forest Products Industry published in October 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Montreal (Quebec, Canada), Resolute produces newsprint, commercial printing papers, market pulp, tissue and wood products. Net sales for the last twelve months ending June 2016 were $3.6 billion. (Source: press release)