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Rating Action:

Moody's assigns Ba1 to Clearwater Paper's senior secured term loan

08 Jul 2019

Approximately $875 million of rated debt

Toronto, July 08, 2019 -- Moody's Investors Service, (Moody's) assigned a Ba1 rating to Clearwater Paper Corporation's ("Clearwater") new $300 million senior secured term loan and affirmed the company's Ba2 corporate family rating (CFR), Ba2-PD probability of default rating and Ba3 senior unsecured rating. Clearwater intends to use the net proceeds of the new term loan and a new $250 million asset-based loan (ABL; unrated) to refinance the borrowings under its existing $400 million in secured revolvers (unrated). The company's liquidity rating was upgraded to SGL-2 from SGL-3 and the company's outlook remains stable.

"The transaction is leverage neutral and the affirmation of Clearwater's existing ratings reflects our expectations that Clearwater's leverage (adjusted Debt to EBITDA) will decline to around 4x by 2021 following the ramp-up of its new tissue machine and completion of its pulp optimization project", said Ed Sustar, Senior Vice President with Moody's.

Affirmations:

..Issuer: Clearwater Paper Corporation

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

.... Corporate Family Rating (Local Currency), Affirmed Ba2

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3 to (LGD5) from (LGD4)

Assignments:

..Issuer: Clearwater Paper Corporation

....Senior Secured Term Loan, Assigned Ba1 (LGD2)

Upgrades:

..Issuer: Clearwater Paper Corporation

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

Outlook Actions:

..Issuer: Clearwater Paper Corporation

....Outlook, Remains Stable

RATINGS RATIONALE

Clearwater (Ba2 CFR) benefits from 1) mid-level North American market positions in the relatively stable demand segments of private label tissue and high-end consumer paperboard packaging, 2) expected adjusted debt/EBITDA leverage around 4x once the tissue expansion and pulp optimization projects are fully ramped up in 2021, and 3) good liquidity with the significant reduction of capital expenditures and the new $250 million ABL. Clearwater is constrained by 1) its high leverage and its execution risk of deleveraging towards 4x over the next 2 years, 2) potential near-term over-supply in tissue with several new tissue paper machines (including Clearwater's tissue expansion) ramping up, and 3) vulnerability to larger and financially stronger competitors.

Clearwater is completing the multi-year construction of a new tissue machine at its Shelby, NC, mill, and replacement of a batch digester with a continuous digester at Lewiston, ID. Leverage was 5.5x at March 2019, and we expect that it will increase to 6.4x by yearend before declining to 4.4x in 2020 and 3.9x in 2021, through both EBITDA growth and debt reduction.

The company's new Ba1 rated $300 million secured term loan, which has a first priority lien on the company's fixed assets and a second priority on assets securing the new $250 million ABL facility, benefit from the loss absorption cushion provided by the company's $575 million senior unsecured notes and other junior liabilities.

Clearwater has good liquidity (SGL-2) with about $240 million in liquidity sources to fund about $10 million of short term debt maturities (pro forma for the company's announced refinancing). Sources are 1) $12 million of cash (March 2019), 2) almost full availability under the company's new $250 million ABL facility (matures in 2023 or July 2024, depending on notes outstanding) and 3) Moody's estimate of $25 million of free cash flow generation over the next 12 months, as the company's capital expenditures have declined significantly following the near completion of its tissue expansion and pulp optimization projects. Most of the company's assets are encumbered under the new term loan and ABL.

The stable outlook reflects Moody's expectation that Clearwater's leverage will trend down to 3.9x in 2021 (from 5.5x in March 2019 and 6.4x expected in December 2019) through debt reduction from improved free cash flow as capital expenditures return to normal levels and as EBITDA increases from the full ramp-up of the new tissue machine, operational improvements, including the new pulp digester, and lower pulp prices. EBITDA will actually decline slightly in 2019 as start-up costs for the new tissue machine and higher than normal mill downtime (both of the company's bleached paperboard mills are scheduled to be down for several weeks for maintenance in the second half of 2019) will more than offset earnings from the ramp up of the new tissue machine and the roll through of recently implemented bleached paperboard and tissue price increases. We see bleached paperboard and tissue prices remaining flat at current levels over the next 12 to 18 months, as market pulp prices decline.

Factors that could lead to an upgrade

» the company's normalized retained cash flow to adjusted debt is sustained at or above 20% (13% as of March 2019)

» the ratio of adjusted debt to EBITDA is sustained at or below 3x (5.5x as of March 2019)

» EBITDA margins approach 16% (11% as of March 2019)

Factors that could lead to a downgrade

» the company's liquidity position deteriorates significantly

» the company's normalized retained cash flow to adjusted debt is sustained below 10% (13% as of March 2019)

» the company total adjusted debt to EBITDA are sustained above 4.5x (5.5x as of March 2019)

» EBITDA margins sustained below 10% (11% as of March 2019)

The principal methodology used in these ratings was Paper and Forest Products Industry published in October 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Spokane Washington, Clearwater is a leading North American producer of private label tissue products (toilet paper, paper towels, facial tissue and napkins) and bleached paperboard (SBS -solid bleached sulphate, principally used in packaging of higher value branded consumer products such as cosmetics and pharmaceuticals).

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 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.

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

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.

Ed Sustar
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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