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Rating Action:

MOODY'S AFFIRMS BERRY PLASTIC'S RATINGS (B1 SENIOR IMPLIED) AND ASSIGNS B1 TO ITS PROPOSED $465 MM INCREMENTAL 1ST LIEN TERM C LOAN; RATINGS OUTLOOK IS STABLE

17 May 2005
MOODY'S AFFIRMS BERRY PLASTIC'S RATINGS (B1 SENIOR IMPLIED) AND ASSIGNS B1 TO ITS PROPOSED $465 MM INCREMENTAL 1ST LIEN TERM C LOAN; RATINGS OUTLOOK IS STABLE

Approximately $1.3 Billion of debt securities affected

New York, May 17, 2005 -- Moody's Investors Service affirmed the ratings of Berry Plastics Corporation ("Berry Plastics") and assigned a B1 rating to its proposed incremental $465 million first lien term loan, which is an add-on to its existing senior secured credit facility. The ratings actions arise from Berry Plastics' intended acquisition of Kerr Group, Inc. ("Kerr" having a B1 senior implied rating and a stable ratings outlook) for approximately $445 million including repayment of existing indebtedness and excluding fees. This proposed all debt financed acquisition represents the largest purchase in Berry Plastics' history. In Moody's opinion, the attractiveness of Kerr's intellectual property, research and development capabilities, and regulatory process approvals for healthcare packaging are reflected in the seemingly rich purchase price (estimated to be over 7 times the target's EBITDA).

Moody's took the following ratings actions for Berry Plastics:

- Assigned B1 rating to the proposed $465 million add-on first lien senior secured term C loan through an amendment of the existing credit agreement, maturity is to be concurrent with the term B loans

- Assigned B1 rating for the proposed senior secured credit revolver of $100 million with add-on capabilities of up to $150 million, maturing on March 31, 2010

- Affirmed B1 rating for the existing approximately $331 million term B loans outstanding, now maturing concurrently with the proposed add-on term C loan

- Affirmed B3 rating for the existing $344 million 10.75% senior subordinated notes, due 2012

- Affirmed B1 senior implied rating

The ratings outlook is stable.

The ratings are subject to the review of final documentation. Upon closing of the proposed acquisition and repayment of the outstanding senior secured bank debt (rated B1) at Kerr, all ratings for Kerr will be withdrawn. Also, the rating of Berry's existing $100 million senior secured revolver has been withdrawn.

The affirmation of the ratings acknowledges the sound operating performance of each company independently as they continue to navigate industry-wide business challenges that are likely to persistently pressure margins throughout the near term (e.g. high resin, freight, fuel, and other operating costs combined with pricing pressure and the need for meaningful capital spending to support volume, efficiency, and growth). The ratings also incorporate the significant invested equity of Berry's investor group, led by Goldman Sachs Capital Partners, JP Morgan Capital Partners, and senior management, collectively in excess of $330 million since 2002 for which there have not been any distributions to date.

The ratings reflect the complementary nature of the proposed acquisition given the minimal overlap of customers or products and because each company brings different competencies, technologies, and platforms upon which the other should be poised to leverage. Throughout the rating horizon, Moody's expects Kerr's presence in the profitable and growing healthcare specialty plastic closures, containers, vials, and tubes (approximately one-third of its estimated $375 million consolidated revenue at December 31, 2004) to benefit from the improved resources that Berry Plastics will afford while the latter is expected to leverage the introduction of those new capabilities to its businesses. Pro forma for the combination, EBITA return on assets is expected to remain slightly in excess of 10%, which denotes solid profitability.

Despite Moody's favorable view of the proposed combination, our continued expectation of solid operating performances for both companies, and Berry Plastics' proven record of solid integration and rapid post-acquisition debt reduction as done with its approximately $228 million all-in purchase of Landis Plastics, Inc. during the fourth quarter of 2003, the ratings also reflect stretched credit statistics pro forma for the proposed transactions which place the combined Berry Plastics at the maximum tolerance point for the existing ratings categories.

Pro- forma financial leverage is high with free cash flow to total debt before meaningful lease adjustments expected to be well below 5% throughout the intermediate term and debt to combined EBIT at approximately 8 times (over 5 times EBITDA). Pro forma coverage of interest expense should be acceptable as EBIT coverage is anticipated to be roughly 1.5 times (approximately 3 times EBITDA coverage).

Senior financial leverage is aggressive for the B1 rating at approximately 3.7 times pro forma EBITDA (including approximately $21 million of capital leases). Any increase in senior leverage could trigger a downgrade in the B3 rating for the senior subordinated notes. Additionally, any sustained increase in the level of senior obligations at Berry Plastics or at the non-guarantor subsidiaries would deepen the subordination of the notes and could also trigger a downgrade in the notes' rating.

The stable ratings outlook is highly sensitive to the pro forma combined company's ability to remain on plan with financial expectations, specifically to remain free cash flow positive and use all available resources to meaningfully reduce financial leverage in the near term. Negative variance under integration or operating expectations could trigger a change in the ratings outlook to negative from stable. While Moody's longer term view of Berry Plastics is stable, the absence of meaningful cushion under pro forma credit statistics undermines stability during the near term.

Adequate liquidity expected throughout the next few quarters provides some comfort to near term stability in the ratings as combined cash from operations is expected to satisfy working capital and non-extraordinary capital expenditures. Minimal advances under the proposed $150 million revolver are expected (on average, approximately $13 million of letters of credit should be outstanding). Average cash on hand will likely be modest at around $3 million. Liquidity is also expected to benefit from net operating losses at Kerr and no expectation of meeting a modest earnout associated with one of Kerr's prior acquisitions. Although financial covenants were not finalized at the time of this review, they are expected to be set at standard advances of plan, thus providing satisfactory headroom.

The B1 rating for the amended credit facility and incremental term loan reflects its priority position in the capital structure and the expectation of collateral coverage in the event of default. The magnitude of committed secured facilities (approximately 70% of total pro forma debt) precluded notching above the B1 senior implied rating. Guarantees, security, representations and warranties, etc. are expected to be substantially similar to those set forth in the existing credit agreement. Additionally, the amended facility will include the ability to incur incremental term loans of up to approximately $150 million on an uncommitted basis subject to certain defined conditions.

The B3 rating for the senior subordinated notes is under pressure given the substantial amount of pro forma senior debt (approximately $820 million) and concern regarding structural subordination to senior obligations at non-guarantor subsidiaries, which is expected to account for approximately 20% of total pro forma consolidated assets.

Headquartered in Evansville, Indiana, Berry Plastics Corporation is a leading manufacturer and supplier of a diverse mix of rigid plastic packaging products focused on open-top containers, closures, aerosol overcaps, drink cups, and housewares. At December 31, 2004, revenue was approximately $814 million. Headquartered in Lancaster, Pennsylvania, Kerr Group, Inc. is a producer of specialty closures and containers for the healthcare, food and beverage, and personal care markets. At December 31, 2004, revenue was approximately $375 million. The controlling shareholder of Kerr Group, Inc. is Fremont Partners.

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kendra M. Smith
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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