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21 Jun 1999
MOODY'S ASSIGNS B2 RATING TO CONSOLIDATED CONTAINER COMPANY'S SENIOR SUBORDINATED NOTES AND A Ba3 RATING TO ITS SECURED CREDIT FACILITY
Moody's Investors Service assigned a B2 to the proposed $185 million of senior subordinated notes, due 2009, to be issued jointly by Consolidated Container Company LLC and Consolidated Container Capital Inc., and assigned a Ba3 to Consolidated Container Company LLC's ("CCC") new $475 million of senior secured bank credit facilities, maturing latest 2007. The senior implied rating is Ba3. The ratings outlook is stable. This is the first time Moody's has rated the debt of CCC.
CCC is a newly formed company, combining substantially all of the former US rigid plastics packaging businesses of Suiza Foods Corporation ("Suiza") and rigid plastics businesses of Reid Plastics Holdings, Inc. Upon completion of the deal, Vestar Capital Partners III, LP and Suiza will control approximately 51% and 49% of CCC, respectively. For the 12 months ended March 31, 1999, CCC generated pro-forma net revenues of $688 million and pro-forma adjusted EBITDA of $123 million.
The proceeds from the notes and bank credit facilities are expected to refinance/redeem existing debt assumed in the transaction and to provide funds for general corporate purposes.
The ratings reflect the company's high leverage, weak balance sheet, mature industry profile, integration risks, expectation of further acquisitions and the highly competitive nature of the packaging industry.
More positively, the ratings recognize the company's relatively stable cash flows, the additional $60 million of cash equity injected by Vestar Capital Partners and expectation of improving cash flow measures through achieving synergies. Moody's also takes into consideration CCC's leading market shares, long customer relationships, key on-site facilities and benefits of the continuing substitution of plastic for other forms of packaging materials. The ratings also take into account the relative rankings of the debt within the overall capital structure and any associated collateral packages.
The B2 rating of the proposed $185 million of notes reflects their contractual subordination to senior debt, notably to outstandings under the company's secured $475 million secured credit facility, with $405 million initially outstanding. The subordinated notes are guaranteed on a subordinated basis by all existing and future domestic restricted subsidiaries. Given, the sizable amount of senior secured debt ranking ahead of the notes and the highly intangible nature of the balance sheet (goodwill accounts for near 57% of total assets), the notes lack tangible asset coverage. The Ba3 rating of the bank credit facilities reflects their senior secured position. The credit facilities are secured by a first priority security interest in substantially all tangible and intangible assets and a first priority pledge of all capital stock of domestic subsidiaries and 65% of all foreign subsidiaries (except for J/V in Mexico). In Moody's opinion, tangible collateral support may not be sufficient to provide adequate coverage of outstanding debt in a distressed scenario.
CCC is a leading domestic developer, manufacturer and marketer of rigid plastic containers, with the sale of over 4 billion plastic containers in 1998. Through acquisition, the company has grown its molding capabilities and materials diversity. CCC's technical capabilities appear to be good, as evidenced by the company's ability to engineer custom features for increasingly demanding end clients. Revenues are well spread across numerous end sectors, in particular dairy, water, food and beverage, automotive and other industrial and household applications. Dairy, which accounted for approximately 23% of pro-forma revenues, is expected to remain the company's largest sector.
Most of CCC's key markets are relatively mature, albeit water containers continues to evidence good growth prospects. Overall organic growth is expected to be slightly above GDP, depending on the end product mix and the general state of the economy. Moody's anticipates that the company will continue to benefit from the substitution trend of plastics for other packaging materials, particularly in foods and beverages. The company, however, has limited PET capabilities and if there is a substantial growth in PET, over other forms of plastics, CCC may be at a competitive disadvantage in some core sectors.
The ratings reflect the relative stability of revenues but also take into account the tough pricing environment which may place some pressure on top line growth and margins. The company serves some major US names which, although adding credit comfort to receivables, necessitates consistent high level of service, R&D assistance and cost competitive products. There is customer concentration among CCC's top ten customers, which account for approximately 48% of revenues, however, Moody's concerns are moderated by the company's term contracts renewal record, key on-site facilities and CCC's expanded network and proximity to end markets.
The rigid container market continues to consolidate, but the overall market remains relatively fragmented, with many smaller independent manufacturers pursuing niche strategies. Competition on a national scale, however, is increasingly concentrated among a few larger players, some of whom have greater financial resources than CCC. It is anticipated that CCC will pursue additional acquisitions to strengthen its positions, albeit the near term strategy is expected to be one of internal integration, with any transactions likely to be smaller bolt-on acquisitions to enhance the company's domestic businesses. International expansion is expected to be a more medium term goal. Given this position, CCC may continue to lag some key competitors who are already able to offer a more global packaging solution to some shared customers.
As a consolidator, CCC has grown rapidly over its recent history. It is essential that management remains highly focused on integrating facilities and technical platforms to reduce costs given expectation of little additional savings on resin purchases. Emphasis on sharing best practices and implementing common financial policies will also be key to effectively managing the company's broadened scope. CCC expect to realize approximately $12 million in near term synergies through, plant rationalization, corporate overhead reduction and improved distribution networks. The level of synergies is expected to rise to $20 million over two years. Recognizing the commodity nature of CCC's core products and the amount of total debt relative to revenues (85%), achieving synergies and continually maintaining low cost facilities will be key to sustaining improvements in cash flow measures and keeping EBITA return on total assets above 10%. On a pro-forma basis, including first year synergies, EBITA return on total assets amounts to 10.5%.
On a pro-forma basis, CCC balance sheet is weak, with sizable goodwill. The company is highly leveraged with total debt-to-capitalization of 70% and total debt- to-adjusted EBITDA of 4.8-times. Leverage on an EBITDAR basis increases to 5.2-times if operating leases are capitalized. Adjusted EBITDA to total interest is 2.5-times, while EBITA coverage is lower at 1.9-times. Moody's believes first year pro-forma synergies are achievable, in which interest coverage ratios improve to 2.7-times and 2.1-times, respectively. Total capital expenditures are expected to be at lower levels than fiscal 1998, with emphasis on relocating acquired assets to suit the new business mix and de-emphasis on sizable acquisition capital. Management estimate total capital expenditures for fiscal 1999 will amount to near $50 million. Term amortization is expected to be $7.5 million and $15 million in years 1 and 2, which gives the company some operating cushion.
The newly arranged, secured credit facilities comprise a $90 million revolving credit facility maturing 2003; a $150 million term loan A, maturing 2005; and a $235 million term loan B, maturing 2007. At closing, the company is expected to have approximately $70 million of availability under its revolving credit facility to support cash flow from operations.
The notes are being sold in a privately negotiated transaction without registration under the Securities Act of 1933 under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. The issuance has been designed to permit resale under Rule 144A.
Dallas headquartered, Consolidated Container Company LLC, is a leading developer, manufacturer and marketer of rigid plastic containers for large consumer products and beverage companies. Consolidated Container Capital Inc. is a wholly owned special purpose subsidiary.
No Related Data.
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