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Rating Action:

Moody's assigns B1 to Reynolds new senior secured facilities, affirms B2 CFR; outlook stable

16 Sep 2020

New York, September 16, 2020 -- Moody's Investors Service (Moody's) affirmed the B2 Corporate Family Rating and B2-PD Probability of Default Rating of Reynolds Group Holdings Inc. (Reynolds). Moody's also assigned B1 ratings to Reynolds Group Holdings Inc.'s new senior secured credit facilities, including the proposed $250 million revolving credit facility due 2024 and the $1,000 million senior secured term loan due 2026, and to Reynolds Group Issuer Inc.'s proposed $1,000 million senior secured notes due 2027. The proceeds of the new debt, along with proceeds from the proposed IPO and available cash, will be used to pay down existing debt. The new facilities are expected to have the same terms and conditions as the existing facilities and all are pari passu.

Moody's also affirmed the B1 rating on the company's existing senior secured facilities and the Caa1 rating on the company's existing senior unsecured notes. The existing senior unsecured notes at Reynolds Group Issuer Inc. due 2024 and the $302 million revolving credit facility due 2021 at Reynolds Group Holdings Inc. will be withdrawn at the close of the transaction as they are expected to be completely paid down. The outlook remains stable. And finally, the company's SGL-2 Speculative Grade Liquidity Rating is maintained.

On September 8, 2020, Pactiv Evergreen Inc. (PTVE, currently known as Reynolds Group Holdings Limited, parent of Reynolds Group Holdings Inc.) announced that it had launched an initial public offering of its common stock. In conjunction with the IPO, PTVE is also refinancing certain debt. The company is expected to pay down approximately $1,365 million of debt assuming IPO proceeds of $800 million.

The affirmation of the ratings reflects Moody's expectation of improvements in pro forma credit metrics in 2021 as the company benefits from productivity initiatives, debt reduction and some recovery in the foodservice end market from the coronavirus pandemic. Moody's expects leverage to decline from 7.1x, pro forma for the IPO, recent divestitures and refinancing as of 2Q20, to 6.2x by the end of 2021. The EBITDA margin is expected to improve to over 15.0% from 13.7%. Free cash flow to debt is expected to be over 2.5% as one-time costs for the IPO, pension liability payment and productivity initiatives in 2020 do not recur in 2021. Moody's expects the company to maintain good liquidity with pro forma cash of approximately $497 million, full availability under the $250 million revolver and adequate cushion under the existing covenants.

The ratings are subject to the receipt and review of the final documentation.

Assignments:

..Issuer: Reynolds Group Holdings Inc.

....Senior Secured Bank Credit Facility, Assigned B1 (LGD3)

..Issuer: Reynolds Group Issuer Inc.

....Senior Secured Regular Bond/Debenture, Assigned B1 (LGD3)

Affirmations:

..Issuer: Pactiv Corporation

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa1 (LGD5) from (LGD6)

..Issuer: Reynolds Group Holdings Inc.

.... Probability of Default Rating, Affirmed B2-PD

.... Corporate Family Rating, Affirmed B2

....Senior Secured Bank Credit Facility, Affirmed B1 (LGD3)

..Issuer: Reynolds Group Issuer Inc.

....Senior Secured Regular Bond/Debenture, Affirmed B1 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa1 (LGD5) from (LGD6)

Outlook Actions:

..Issuer: Pactiv Corporation

....Outlook, Remains Stable

..Issuer: Reynolds Group Holdings Inc.

....Outlook, Remains Stable

..Issuer: Reynolds Group Issuer Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

Weaknesses in Reynolds credit profile include a high customer and end market concentration of sales and a controlling interest by a single individual. The company lacks contracts and raw material cost pass throughs for a high percentage of its business which lowers switching costs for customers and leaves Reynolds exposed to increases in volatile raw material costs. Reynolds operates in the fragmented and competitive packaging sector which makes margin expansion challenging.

Strengths in the company's credit profile include a high percentage of revenue from food and beverage end markets and long-standing relationships with blue chip customers. Reynolds also has strong brand names in its segments and a continued focus on sustainability and productivity including significant investments in automation, systems and new product development.

Reynolds has little exposure to industries that may be negatively affected by the rapid and widening spread of the coronavirus outbreak and high exposure to those that are expected to benefit including food and beverage. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Governance risks are still heightened given that Reynolds will remain majority owned (77%) and controlled by one individual (Graeme Hart) following the planned IPO. Graeme Hart has undertaken numerous transactions with his companies in the past including debt financed acquisitions and has been financially aggressive.

The stable outlook reflects Moody's expectation that the company will realize significant cost savings from its recently implemented initiatives, maintain good liquidity and improve credit metrics. Credit metrics are stretched pro forma for the IPO, recent divestitures and refinancing as of 2Q20, and Reynolds will need to achieve significant improvement in order to maintain the rating.

The SGL-2 Speculative Grade Liquidity Rating reflects an expectation of weak free cash flow over the next 12 months offset by a large cash balance and full availability under the revolver. Free cash flow is expected to be constrained over the next 12 months as the company incurs costs for the IPO, pension liability funding and productivity initiatives. Pro forma for the transaction, Reynolds is expected to have $497 million in cash and full availability under the proposed $250 million revolving credit facility.

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

The ratings could be downgraded if Reynolds fails to achieve the expected improvement in credit metrics or there is any deterioration in liquidity or the operating environment. Specifically, the ratings could be downgraded if:

» Debt to EBITDA is above 6.3x

» EBITDA to interest expense is below 2.5 times

» Free cash flow to debt is below 2.0%

The rating could be upgraded if Reynolds sustainably improves its credit metrics within the context of a stable operating environment while maintaining adequate liquidity. Specifically, the ratings could be upgraded if:

» Debt to EBITDA is below 5.25 times

» EBITDA to interest expense is above 3.5 times

» Free cash flow to debt is above 4.0%

Reynolds (a subsidiary of Pactiv Evergreen Inc., NASDAQ symbol PTVE) manufactures and distributes fresh foodservice and food merchandising products and fresh beverage cartons. The company is based in Chicago, Illinois and controlled by financier Graeme Hart (77% ownership).

The principal methodology used in these ratings was Packaging Manufacturers: Metal, Glass and Plastic Containers Methodology published in September 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1236221. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

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.

Edward Schmidt, CFA
Vice President - Senior Analyst
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

Dean Diaz
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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