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Rating Action:

Moody's affirms Neenah's Ba2 CFR, changes outlook to negative

13 Apr 2020

New York, April 13, 2020 -- Moody's Investors Service ("Moody's") affirmed Neenah, Inc.'s Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default rating and the Ba3 Senior Unsecured notes rating. Moody's also changed the outlook to negative and downgraded the speculative grade liquidity rating to SGL-3 from SGL-2. The change in outlook and the speculative-grade liquidity rating reflects the need to refinance the $175 million notes due in May 2021 at a time in which there is an expected deterioration of metrics and challenging market conditions. The affirmation of Neenah's ratings reflects strong balance sheet metrics prior to the projected negative impact on financial performance from the coronavirus pandemic, projected free cash flow generation even during the economic stress and expected recovery in metrics in 2021, assuming notes are refinanced.

Downgrades:

..Issuer: Neenah, Inc.

.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

Affirmations:

..Issuer: Neenah, Inc.

.... Probability of Default Rating, Affirmed Ba2-PD

.... Corporate Family Rating, Affirmed Ba2

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3 (LGD5)

Outlook Actions:

..Issuer: Neenah, Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Neenah's Ba2 CFR rating reflects the company's strong brand recognition, long-term growth potential in the technical products business, strong balance sheet credit metrics and track record of free cash flow generation. The company's debt/EBITDA and EBITDA/interest for the twelve months ended December 2019, as adjusted by Moody's, stood at 2.2 times and 8.4 times, respectively, and retained cash flow to debt was 26.4%. Moody's expects a significant decline in demand for Neenah's technical products, such as filtration media, and graphic paper due to the expected negative impact of the coronavirus pandemic on the global economy. This will result in weaker earnings and credit metrics in 2020, but the company is expected to lower its capex and control expenses and still generate free cash flow. We also expect metrics to return to levels consistent with the rating once the economy recovers in 2021, based on our current macroeconomic scenario. The affirmation of the Ba2 CFR also reflects Moody's expectation that the company will maintain its conservative financial policy with the pending change of the company's leadership. The company historically reinvested the majority of its operating cash flow in the business, while maintaining dividend growth and supplementing its organic growth with acquisitions funded with a combination of cash, free cash flow and borrowings. On April 2, the company announced it had not closed its $155 million acquisition of Vectorply on April 1 as originally contemplated. The purchase agreement includes customary termination provisions, including a right by the buyer or the seller to terminate the agreement if the closing has not occurred on or before June 1, 2020.

The rating is constrained by the company's limited scale and lack of diversification relative to its peers, exposure to cyclical inputs and end markets and expectations for continued secular contraction in demand for printing and writing papers. Neenah is one of the smallest Ba-rated companies in the paper and forest products industry. The company is not back-integrated into pulp used in its paper-making processes and thus is exposed to volatile softwood and hardwood pulp pricing as well as latex, natural gas and rising freight costs. The company also has near-term refinancing risk, which prompted the change of the speculative grade liquidity rating to SGL-3 and the change in outlook to negative.

The SGL-3 speculative grade liquidity rating reflects Moody's view that the company will not be able to repay $175 million notes due in May 2021 with cash generated by internal sources. The company had approximately $9 million of cash on hand at the end of December 2019 and is projected to generate free cash flow (after dividend payments) of over $20 million in 2020, assuming a decline in earnings and a cut in capital expenditures to about $15 million. The company has a $225 million asset-based revolver due in December 2023, which could be used to refinance the 2021 maturity, but that would leave the company with limited external sources of liquidity. The company would need to refinance the notes in the bond market or with a term loam, instead. The facility has a springing fixed charge coverage test set at 1.1 times if availability falls below $20 million or 10% of the maximum aggregate commitments of the revolver. The company would be in compliance with the covenant now but might not meet the test if EBITDA declines significantly. Most of the assets are encumbered by the secured credit facility leaving limited alternative liquidity available.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The paper sector is affected by this shock given its sensitivity to industrial and consumer demand and sentiment. However, in most jurisdictions, the paper and forest products industry is deemed an essential service. This designation allows Neenah and most other paper and forest product companies to continue to supply products used in the food and beverage industry, infrastructure and construction projects as well as the manufacture of fiber-based personal hygiene products (which are currently seeing increasing demand) such as tissue products, breathing masks and medical gowns. Nonetheless, the impact on Neenah's credit profile could leave it vulnerable to shifts in market sentiment in these unprecedented operating conditions as the outbreak continues to spread. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety, as well as the associated economic impact.

Another social risk for Neenah is the secular decline in printing and writing paper as consumers and companies move to digital alternatives. The company has been managing this risk by closing, divesting assets or repurposing them into higher growth technical products. Moody's believes the company has established expertise in complying with moderate environmental and social risks and has incorporated procedures to address them in its operational and business models. Governance risks are low as Neenah is a public company with established and transparent reporting and conservative financial policies. The company has announced leadership change with COO Julie Schertell set to succeed CEO John O'Donnell in May upon his retirement.

The negative rating outlook reflects expectations of deteriorating operating conditions and refinancing risk with $175 million of notes maturing in May 2021. Moody's could stabilize the outlook if the company refinances its 2021 maturity and improves its liquidity and operating conditions and performance improve.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could downgrade the rating if the company fails to refinance $175 million notes in a timely manner. The ratings could also be downgraded if there is a significant deterioration in the company's operating performance and free cash flow is persistently negative. Specifically, Moody's could downgrade the rating if adjusted debt/EBITDA exceeds 4x for a sustained period of time, and EBITDA margins are sustained below 15%, or if there is a prolonged weakness in some of the company's cyclical markets or changes in financial management.

Upward rating momentum is unlikely due to the company's limited scale and diversification. An upgrade could be considered if the company significantly increases its scale and expands its product line, improves margins above 18% and demonstrates that they can be sustained, while also maintaining its strong credit metrics such as leverage sustained between 2.5-3x.

The principal methodology used in these ratings was Paper and Forest Products Industry published in October 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1105007. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Based in Alpharetta, Ga., Neenah Paper, Inc. is a manufacturer of fiber-based technical products and fine paper and packaging products. The technical products business accounts for about half of consolidated sales and manufactures transportation, water and other filtration media as well as backings for specialty tapes and other specialty markets. The fine paper and packaging business manufactures premium printing, packaging and other papers. The company has operations in the US (10 sites) and Europe (4 sites), a small JV in India and reported revenues of approximately $939 million for the 12 months ending December 31, 2019.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Anastasija Johnson
VP - Sr Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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