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Rating Action:

Moody's Assigns B3 CFR and Caa1 rating to Expera's Senior Secured Term Loan, Outlook Positive

30 May 2013

Approximately $178 million of rated debt affected

New York, May 30, 2013 -- Moody's today assigned first-time ratings to Expera Specialty Solutions (Expera), including a B3 corporate family rating (CFR), B3-PD probability of default rating, and a Caa1 rating to $178 million senior secured term loan. Moody's also assigned Speculative Grade Liquidity (SGL) rating of SGL-3. The outlook is positive.

RATINGS RATIONALE

The ratings reflect Expera's relatively small size and scale, concentration in specialty paper products, with geographically concentrated asset base, limited vertical integration and exposure to volatile commodity pricing. Although we believe that the company will have relatively strong leverage and interest coverage metrics if integration is executed successfully, the ratings are constrained by lack of stand-alone operating history of the company in its current configuration. The ratings also reflect the company's environmental exposures and related capital investment requirements going forward.

The positive outlook reflects Moody's expectations of improved debt protection metrics and financial performance upon the realiziation of substantial synergies. Although uncertainties over the resilience of the company's business model as a stand-alone enterprise constrain the ratings, an upgrade would be considered if the performance of the combined enterprise proves to be consistent with our expectations.

The newly formed company will become a major manufacturer of paper-based protective packaging products for the industrial, food, and pressure-sensitive release liner segments. The company produces a diverse range of specialty grades that are custom-engineered to protect end users' products. Representative applications include construction insulation facing, automotive masking tapes, glass and metal interleaver, food wraps, baking papers, microwave popcorn packaging, medical garments, and specialty release liners. In April 2013, KPS Capital Partners ("KPS") formed Expera to acquire Wausau Paper Corporation's ("Wausau") technical and specialty paper business and Thilmany Papers ("Thilmany"), the technical and specialty paper division of Packaging Dynamics Corporation. The combined company will not have any defined benefit or other postretirement benefit obligations. The company's mills include Mosinee paper and pulp mill, Rhinelander paper mill, Kaukauna paper and pulp mill, and De Pere paper mill -- all in the state of Wisconsin. The mills combined operate 16 paper machines with total capacity of 592K tons. KPS is a family of private equity funds with over $6.0 billion of assets under management. KPS Portfolio Companies, as of December 31, 2012, have aggregate annual revenues of approximately $6.8 billion, operate 85 manufacturing plants in 25 countries, and employ over 29,000 associates, directly and through joint ventures worldwide.

We expect that Expera will be able to realize significant synergies and that its combined metrics will be meaningfully stronger than those reported by the acquired businesses as part of larger organizations. We anticipate substantially leaner administrative costs (as compared to historical corporate allocations), as well as savings in procurement and machine optimization. Over the next twelve to eighteen months, we expect the company to generate annual revenues of approximately $760 million, EBITDA margin to range between 6% and 8%, Debt/ EBITDA, as adjusted to be range from 3.7x to 3.9x, and EBITDA/ Interest to range from 4.0x to 4.5x.

That said, one of the key factors constraining the ratings is that many of company's competitors have larger scale, more product diversity, and have greater financial resources. Many have entered, and continue to enter, the specialty paper business to increase utilization of paper machines that would otherwise be idle. Accordingly, we expect that some of the company's markets may become oversupplied, and that its larger competitors may be better positioned to weather these industry conditions due to their diversification in other products, greater vertical integration, or both. Demand for company's products is also affected by general economic conditions as well as product-use trends. Although Expera is focused on higher value-added specialty grades of paper, and supplies a diverse mix of customers, the competitiveness of the company's markets could cause demand and pricing for company's products to fluctuate, and could affect the company's ability to compete and generate consistent cash flows during industry downturns.

Expera has strong, long standing business relationships with a diversified base of customers, while its products are designed to meet specific customers' manufacturing and end product requirements. Nevertheless, only 40% of the company's production is secured under contracts, while the company's products generally represent a small portion of the customers' manufacturing process -- further exposing the company to fluctuations in demand and competition from other suppliers.

Wood pulp is the principal raw material used in the company's manufacturing process. The cost and availability of wood and pulp historically experienced great fluctuations due to weather, economic conditions, international demand, particularly in China, and worldwide supply additions or disruptions. While the company's pulp mills supply 45% of internal needs, and the company has generally shown ability to pass through raw material cost increases to its customers, the financial performance of company's businesses has historically fluctuated with commodity pricing. Energy, including coal, diesel fuel, electricity and natural gas, represents a significant portion of the company's manufacturing costs. The company is only about 45% self sufficient in energy, and as such, is exposed to the risk of energy cost increases.

The company is subject to extensive regulation by various federal, state, and local agencies with respect to environmental compliance, which could impact the company's operating costs and capital investments going forward. For example, the new maximum achievable control technology ("MACT") rules published by the United States Environmental Protection Agency are expected to require compliance with stricter air emission limits for industrial boilers by March 21, 2014. The proposed rules are applicable to the coal fired boilers at two of the company's paper mills, and will require substantive capital investment ranging between $12 and $21 million.

The proposed capital structure will include $75 million ABL revolver, which will have first lien on the company's accounts receivable and inventory, and $178 million senior secured term loan which will have first priority lien on substantially all remaining assets of the company. The Caa1 rating on the term loan reflects lack of unsecured debt in the company's capital structure, as well as superior position of the ABL revolver with respect to collateral package.

Speculative Grade Liquidity score of SGL-3 reflects our expectation that the company will have adequate liquidity over the next twelve months, but that it may utilize ABL borrowings to finance capital investments. Pro-forma for the proposed transaction, the company will have no cash balances and will have $70 million availability under the ABL revolver.

The ratings could be upgraded if integration is executed successfully and expected synergies are realized, if EBITDA margins were expected to increase above 9%, the company was expected to generate meaningful free cash flow on a consistent basis, and Debt/ EBITDA was sustained below 4x.

The ratings could be downgraded if liquidity deteriorates, if Debt/ EBITDA were to increase above 6x, if EBITDA margins were expected to fall below 2.5%, or if free cash flow was expected to be persistently negative.

The principal methodology used in this rating was the Global Paper and Forest Products Industry Methodology published in September 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Anna Zubets-Anderson
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Assigns B3 CFR and Caa1 rating to Expera's Senior Secured Term Loan, Outlook Positive
No Related Data.
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