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Rating Action:

Moody's assigns Ba2 rating to Graphic Packaging's new senior unsecured notes

11 Jun 2019

New York, June 11, 2019 -- Moody's Investors Service ("Moody's") assigned a Ba2 rating to Graphic Packaging International, LLC's new $300 million senior unsecured notes due in 2027. The proceeds of the note offering will be used to repay a portion of the revolver borrowings and fund transaction related fees and expenses. At the same time, Moody's affirmed the company's existing ratings, including the Ba1 Corporate Family Rating ("CFR"), Ba1-PD Probability of Default Rating, Baa3 senior secured bank credit facility rating, Ba2 senior unsecured rating and the SGL-2 Speculative Grade Liquidity Rating ("SGL"). The outlook remains stable.

Assignments:

..Issuer: Graphic Packaging International, LLC

....Senior Unsecured Regular Bond/Debenture, Assigned Ba2 (LGD5)

Outlook Actions:

..Issuer: Graphic Packaging International, LLC

....Outlook, Remains Stable

Affirmations:

..Issuer: Graphic Packaging International, LLC

.... Probability of Default Rating, Affirmed Ba1-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

.... Corporate Family Rating, Affirmed Ba1

....Senior Secured Revolving Credit Facility, Affirmed Baa3 (LGD2 from LGD3)

....Senior Secured Term Loan A, Affirmed Baa3 (LGD2 from LGD3)

....Gtd. Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 (LGD5)

RATINGS RATIONALE

The Ba1 CFR is supported by Graphic Packaging's scale, its leading market position in a consolidated industry, modest leverage (Debt/EBITDA of 3.4x in the twelve months ended March 31, 2019 on a Moody's adjusted basis) and strong cash flow generation (RCF/Debt above 21%). Graphic Packaging is the largest North American producer of coated unbleached kraft (CUK) paperboard and coated recycled paperboard (CRB) and the second largest producer of solid bleached sulfate (SBS) board. The company has the largest network of converting plants among North American paperboard producers, converts 71% of the board it produces and passes through cost increases on a contractual basis, albeit with a lag. The rating is constrained by exposure to volatile recycled fiber costs and low organic volume growth. The rating reflects Moody's expectations that Graphic Packaging will continue to increase vertical integration in the SBS consumer packaging business through acquisitions or use free cash flow to buy back shares rather than further reducing debt. The rating also reflects our expectations that leverage metrics will remain near current levels if International Paper Company (IP, Baa2 stable) decides to start monetizing its shares in the combined company in 2020.Under the terms of the current agreement, IP can monetize up to $250 million worth of its holding at a time and has to wait six months between each request to monetize its stake. IP can receive the proceeds in either cash or stock at Graphic Packaging's option. Assuming an all cash payment, Graphic Packaging's leverage could increase half a turn if IP exercises its right twice in one year. The rating reflects expectations that the company would slow down share repurchases to return metrics within its own stated net leverage target of 2.5-3.0x if leverage increases as a result of the IP transaction.

Graphic Packaging's SGL-2 speculative grade liquidity rating indicates good liquidity. The company maintains low cash balances and relies on internally generated cash and a large revolver for its liquidity. Graphic Packaging had approximately $62 million of cash on hand as of March 2019, which was mostly located in foreign jurisdictions. Internal cash generation is supported by a significant amount of NOLs (approximately $168 million as of December 31, 2018). Graphic Packaging is not expected to become a meaningful federal cash taxpayer until 2021. The company had over $880 million of availability under its $1.45 billion U.S. senior secured revolving credit facility. The company intends to use the proceeds from the proposed $300 million note offering to repay a portion of its revolver borrowings. The revolver and a $800 million term loan mature in 2023 along with assumed $660 million term loan from IP. The nearest maturity is $425 million of notes due in 2021. The company's amended and extended senior credit agreement has a total leverage ratio covenant of 4.25 times as well as an interest coverage covenant of 3 times. Moody's expects the company will remain in compliance with its debt covenants over the next 12 months.

The senior secured revolver and the senior secured term loans are rated Baa3 (one notch above the Ba1 CFR), reflecting their preferential position in the capital structure and the loss absorption cushion provided by the unsecured notes and other unsecured obligations. The secured facilities are secured and guaranteed by all significant domestic operating subsidiaries. The company's unsecured notes are rated Ba2, one notch below the Ba1 CFR, due to the effective subordination to the sizable senior secured debt. The new senior unsecured notes will be guaranteed by Graphic Packaging International Partners, LLC, a holding company that owns the obligor and operating subsidiaries. The existing senior unsecured notes are guaranteed by Graphic Packaging Holding Company, another holding company. Moody's views guarantees as similar and rates both new and existing unsecured notes the same.

The stable outlook reflects expectations that Graphic Packaging will benefit from implemented price increases and maintain strong credit metrics over the next 12 to 18 months.

For the ratings to be upgraded to the investment grade level, the company's management would need to publicly commit to maintaining investment-grade financial policies and achieve an unsecured capital structure. The company would also need to maintain debt/EBITDA below 3 times (3.4x as of March 31, 2019), maintain EBITDA margin above 16% (16.8% as of March 31, 2019) and retained cash flow to debt above 20% (21.2% as of March 31, 2019).The ratings could be downgraded if operating performance and credit metrics deteriorate such as debt/EBITDA rises to 4 times and retained cash flow to debt falls below 15%. The ratings could also be downgraded if the company undertakes a large debt-financed acquisition or shareholder-friendly actions that significantly increases its leverage.

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 Atlanta, GA, Graphic Packaging is one of North America's leading manufacturers of CUK, CRB and SBS paperboard packaging for food, food service, beverages and consumer goods. Graphic Packaging operates 8 paperboard mills that produce 3.8 million tons of boxboard, including approximately 1.5 million tons of CUK, roughly 1 million tons of CRB, 1.2 million tons of SBS and roughly 100,000 tons of corrugated medium. The company has over 65 converting plants in North America, Brazil, Europe, Australia and New Zealand. Graphic Packaging Holding Company owns 78.8% of Graphic Packaging International, LLC and International Paper owns the rest of the company. Graphic Packaging generated sales of approximately $6 billion for the twelve months ended March 31, 2019.

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.

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.

Anastasija Johnson
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

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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