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Hart's Reynolds Group credit rating cut one notch

Friday 7th September 2012

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Reynolds Group Holdings' credit rating was cut one notch as the packaging company owned by New Zealand billionaire Graeme Hart's works to integrate last year's US$4.5 billion acquisition of Graham Packaging and keep its US$18 billion of debt in check.

Moody's Investors Service cut Reynolds Group's corporate family rating (CFR) further below investment grade to B3 from B2, citing "an expectation that future improvement may proceed more slowly than originally projected." Moody's typically uses a CFR rating to cover all of the financial obligations of a speculative-grade corporate issuer.

The rating's outlook was stable on the likelihood the credit metrics will improve. The soft economy and production inefficiencies at the Graham Packaging unit are expected to "drag on operating performance over the intermediate term."

The company's "credit metrics were stressed from a series of debt financed acquisitions and had little room for any negative variance in operating performance," Moody's said. The B3 rating reflects Reynolds Group's "weak pro-forma credit metrics, integration risk and limited operating history for the combined entity."

Earlier this year, Reynolds Group chief executive Tom Degnan told investors the company's level of debt was probably enough and that any future acquisitions wouldn't be of the US$5 billion size like the Graham Packaging and Pactiv takeovers in recent years.

The rising level of debt put rating agencies Standard & Poor's and Moody's on edge last year, with both signalling the debt-funded purchase of Graham Packaging was stretching Reynolds Group's ability to keep on top of interest repayments. The Graham Packaging deal came just one year after the US$6.5 billion takeover of Illinois-based Pactiv.

In July, ratings agency S&P said it didn't expect to downgrade packaging companies, with "slow economic growth, stable consumer spending, and a modest improvement in the unemployment and household savings rates," supporting the sector. It has issued Reynolds with a B-plus rating on a negative outlook.

Moody's said the new rating also reflected the long wait Reynolds Group faces when passing through rising costs of raw materials to its customers, the concentration of sales in certain segments and its financial aggressiveness.

Hart's ownership was also tagged as a reflection of the rating, with Moody's citing Reynolds Group's "complex capital and organisational structure" owned by a single person.

The New Zealand billionaire started building his packaging empire in 2006 with his takeover of Carter Holt Harvey, adding Alcoa's packaging business the following year. He later bought International Paper's beverage packaging unit and Swiss company SiG.

Moody's said the company has strong brands and market positions some segments, and its businesses have a "history of strong execution and innovation prior to their acquisition" with existing management teams largely retained.

Reynolds Group's rating could get upgraded if it can get its debt to earnings before interest, tax, depreciation and amortisation to less than 6.3 times from its current 6.5 times, reduce its pre-tax earnings to at least 1.4 times interest costs, and improve its fresh cash flow in relation to its debt.

Last month, the packaging company reported a profit of US$8 million in the six months ended June 30, turning around a loss of US$104 million a year earlier, as revenue climbed 32 percent to US$6.9 billion with the Graham acquisition. The group's finance costs advanced 14 percent to US$801 million.

On an adjusted ebitda measure, which strips out one-off and unrealised costs, the company's earnings rose to US$1.25 billion from US$893 million.

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