MOODY'S RATES GRAHAM PACKAGING COMPANY, L.P.'S PROPOSED $2.675B FINANCINGS; RATINGS OUTLOOK CHANGED TO STABLE FROM POSITIVE
Approximately $2.7 billion debt securities affected
New York, September 14, 2004 -- Moody's Investors Service rated the proposed debt of Graham Packaging
Company, L.P. ("Graham"), which arises from
its definitive agreement on July 28, 2004 to purchase the Plastic
Container unit ("O-I Plastics") of Owens-Illinois,
Inc. ("O-I") for approximately $1.2 billion
[O-I has a senior implied rating of B2 with a stable outlook].
Despite Graham more than doubling its revenue pro-forma for this
sizable acquisition, Moody's affirmed Graham's existing B2 senior
implied rating. Proceeds from the proposed financings are intended
to finance the acquisition; to refinance Graham's existing $700
million secured credit facility (rated B2); to repay Graham's outstanding
$325 million 8.75% senior subordinated notes,
due 2008 (rated Caa1), as well as the outstanding $169 million
10.75% senior discount notes, due 2009 (rated Caa2),
issued at Graham Packaging Holdings Company ("Holdings"); and to
pay related expenses.
Pro-forma for the proposed transactions, the affirmation
of the B2 senior implied rating recognizes Graham's proven ability to
operate successfully throughout the recent past despite substantial financial
leverage, as evidenced by its ability to maintain industry-leading
margins and adequate liquidity. The rating affirmation reflects
the complementary nature of the proposed acquisition and attributes value
to the realization of some synergies within the near term after combination.
However, the rating remains constrained by the paucity of free cash
flow relative to sizable pro-forma debt, which exceeds pro-forma
consolidated revenue. Moreover, Moody's has concerns about
the quality of earnings, pro-forma for the proposed transactions,
given the high concentration of customers (one customer is approximately
17% of consolidated revenue and the top fifteen customers account
for close to 70%) and the material amount of add-backs to
EBIT given the negative unadjusted pro-forma EBIT. The more
significant adjustments, which represent 100% of adjusted
EBIT, include goodwill and other impairment charges, write-downs
of assets, legal expenses, global restructuring charges,
and project start-up costs (inclusive of the O-I Plastics
intended purchase). Additionally, the rating incorporates
heightened concern about working capital management and the company's
ability to manage timing differences between capital investment and EBIT
Today, Moody's took the following ratings actions:
B2 rating assigned to the proposed $1.6 billion first lien
credit facility consisting of a $250 million revolver, maturing
in 6 years, and a $1.35 billion term B loan,
maturing in 7 years
B3 rating assigned to the proposed $350 million second lien term
C loan, maturing in 7.5 years
Caa1 rating assigned to the proposed $350 million senior unsecured
note, due 2012
Caa2 rating assigned to the proposed $375 million senior subordinated
note, due 2014
SGL-3 Speculative Grade Liquidity Rating affirmed
Senior implied rating of B2 affirmed and moved to Graham from Holdings
Senior unsecured issuer rating of Caa2 (non-guaranteed exposure)
affirmed and moved to Graham
The ratings outlook changed to stable from positive.
The ratings are subject to the closing of the proposed transactions and
review of executed documentation. Upon the closing and concurrent
execution of the proposed financings, the ratings of Graham's existing
debt will be withdrawn.
The change in the ratings outlook to stable from positive reflects the
reversal of Graham's stated debt reduction strategy given the significant
increase in financial leverage required to effect the discussed acquisition.
The downward change to a stable outlook also reflects Moody's concern
about integration risk, which is exacerbated by Graham's stretched
financial profile. While acknowledging that the company has engaged
an outside firm to assist with integration, some execution concerns
linger as this is Graham's most substantial business combination.
The company does not have a history of acquisitive growth.
Given the magnitude of the proposed transactions and the required revitalization
of margins at the acquired O-I Plastics' business,
there is minimal tolerance for operating missteps or deterioration in
pro-forma credit statistics before triggering a negative ratings
outlook. It will likely take several consecutive quarters of on-plan
or better performance before the outlook would be considered solid enough
to migrate back to positive. Specifically, financial leverage
would need to be reduced to at or below pre-acquisition levels
(i.e. close to 8 times debt to EBIT; 5 times debt to
EBITDA); EBIT return on assets returned to mid-teens or better;
and break-even to positive annual free cash flow.
Pro-forma for the proposed transactions, Graham's financial
profile is weak in the near-term. However in Moody's
opinion, the realization of some synergies should be captured fairly
rapidly thereby bolstering the bottom line and taking some of the stress
off Graham's stretched credit statistics during the first year of
combination. Financial leverage is substantial at over 11 times
pro-forma pre-synergies EBIT (slightly over 6 times pro-forma
EBITDA). There is minimal free cash flow as pro-forma capital
expenditures increase to the $200 million and above level,
well over the approximately $90 million spent during fiscal 2003.
Graham is likely to continue to reinvest at levels that exceed depreciation
throughout the intermediate term. EBITDA less capital expenditures
coverage of pro-forma interest expense is thin at virtually one-to-one.
The B2 rating assigned to the proposed first lien credit facility reflects
the priority position in the pro-forma capital structure and the
expectation of collateral coverage. Moody's does not rate
the credit facility better than the senior implied rating of B2 given
the magnitude of committed first lien facilities (roughly 65% of
total pro-forma debt), and the substantial leverage at approximately
7 times pro-forma consolidated pre-synergies EBIT (approximately
4 times EBITDA). Moody's notes that documentation provides
for an uncommitted increase of up to $50 million to the proposed
$250 million revolver, subject to conditions detailed in
the Credit Agreement.
The proposed $1.6 billion facility, consisting of
the $250 million revolver plus a $1.35 billion term
B loan, is intended to be secured by a first priority perfected
lien on the assets, intercompany notes, and stock of the borrower,
Graham, and each of its direct and indirect subsidiaries,
except non-US subsidiaries for which the lien on stock is limited
to 65%. Unconditional guarantees by Holdings and each of
the borrower's wholly-owned direct and indirect domestic
subsidiaries support the facility. At closing, no advances
under the proposed revolver are anticipated. Approximately $2
million letters of credit will be outstanding. Financial covenants
are intended to address maximum total leverage, minimum interest
coverage, and maximum capital expenditures.
Pro-forma liquidity, while expected to remain adequate,
will be reviewed when the transactions have been completed and documentation
has been executed and reviewed (refer to the Speculative Grade Liquidity
Assessment published on September 2, 2004 for Graham).
The B3 rating assigned to the proposed $350 million second lien
term C loan reflects the benefits and limitations of the collateral.
The rating, one notch below the B2 senior implied rating,
reflects the contractual subordination to a sizable amount of first lien
debt. The rating expresses the expectation of collateral coverage.
The loan is to be secured by a second priority perfected lien on the same
collateral securing the first lien debt. An Intercreditor Agreement
is expected to be in place. Guarantees by the same entities as
the first lien facility support the term C loan.
The Caa1 rating assigned to the proposed senior unsecured note reflects
the effective subordination to a substantial amount of secured debt at
Graham and gives consideration to the effective subordination to liabilities
at the non-guarantee subsidiaries. Based upon the significance
of those two, the loss severity on the note would likely exceed
that of secured debt thus resulting in a rating that is two notches down
from the senior implied rating. The note, issued by Graham,
is to be guaranteed on a senior unsecured basis by the same entities supporting
the first and second lien debt.
The Caa2 rating assigned to the proposed senior subordinated note reflects
the contractual subordination to a substantial amount of senior debt at
Graham (approximately $2.07 billion of funded debt -
inclusive of approximately $20 million in assumed debt-
plus a large level of trade payables and accrued expenses) and effective
subordination to all obligations of Graham's subsidiaries.
The rating would represent a downgrade from the existing senior subordinated
notes' rating of Caa1 (to be withdrawn upon repayment from the proceeds
of the proposed transactions) due to the sizable increase in senior indebtedness.
The note, issued by Graham, is to be guaranteed on a senior
unsecured basis by the same entities supporting the senior unsecured note.
Based in York, Pennsylvania, Graham Packaging Company,
L.P. is a leading global designer and manufacturer of customized
blow-molded plastic containers for branded food and beverages,
household and personal care products, and automotive lubricants.
Blackstone Capital Partners of New York is the majority owner.
Pro-forma for the intended acquisition of O-I Plastics,
which is also a manufacturer of technology-based value-added
custom plastic packaging, consolidated annual revenue would be approximately
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Kendra M. Smith
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service