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Rating Action:

Moody's assigns Ba3 CFR to Schweitzer-Mauduit; stable outlook

10 Sep 2018

New York, September 10, 2018 -- Moody's Investors Service (Moody's) assigned first-time ratings to Schweitzer-Mauduit International, Inc. (SWM) including a Corporate Family Rating (CFR) of Ba3, Probability of Default Rating of Ba3-PD, senior unsecured rating of B2 and Speculative Grade Liquidity rating of SGL-2. The rating outlook is stable.

The rating assignments follow the company's plan to issue $350 million of senior unsecured notes to repay existing debt. The company will also arrange a new term loan and revolving credit facility, both unrated, in connection with the issuance of these new notes, which will provide capital structure flexibility.

RATINGS RATIONALE

The assigned ratings consider the benefits of SWM's revenue diversification strategy initiated in 2013 with the acquisition of DelStar, Inc., a custom manufacturer of plastic/resin-based materials focused primarily on water filtration. Adding specialty materials products to its traditional portfolio of cigarette papers and reconstituted tobacco products was important due to the secular decline of the cigarette industry. Nonetheless, despite the slow decline, the relative stability provided by the high margin, high free cash flow Engineered Papers segment will continue to help fund SWM's growth and diversification. Expansion of the Advanced Materials & Structures segment should enhance consolidated margins due to solid organic growth prospects from several of its end markets as well as the benefits of greater scale and scope. Consolidated operations produce competitive EBITDA margins in the 20% range and annual free cash flow (cash flow from operations less capital expenditures less dividends) approximating $50 million, supportive of the rating assignments. The acquisition-driven growth and diversification strategy has been mostly debt-funded, however, application of free cash flow to debt repayment has leveled debt-to-EBITDA to the mid-3x range at June 30, 2018.

The ratings also consider the company's modest scale and potential operational and financial uncertainty stemming from the likelihood of additional acquisitions to further grow the Advanced Materials & Structures segment. However, the company's transformation via debt-financed acquisitions has been fairly measured to date and Moody's anticipates that the company will continue to reduce debt following larger acquisitions to restore debt-to-EBITDA to pre-transaction levels in a timely manner. The rating assignments also reflect the expectation that the company will continue to be able to offset increases in costs of key raw materials, such as plastic resin and wood pulp, as these occur, to mitigate downward pressure on earnings.

Moody's believes that SWM has reached an important juncture having established better balance between its two operating segments but expects acquisition-driven growth will remain a key element to diversifying away from tobacco-related revenues. At the same time, Moody's expects the company to exercise restraint regarding its growth and diversification strategy with acquisition activity maintained at a measured pace consistent with its scale. Moody's anticipates debt-to-EBITDA to remain below 4x, absent an unexpectedly large transaction, allowing adequate financial flexibility to execute organic growth initiatives.

A strong market position supported by the company's low ignition propensity cigarette paper as well as more recent product developments such as heat-not-burn cigarettes have helped slow the decline in tobacco-related revenues. Additionally, several key end markets tied to the Advanced Materials & Structures segment are experiencing favorable fundamentals, including filtration, transportation and infrastructure where revenue growth should comfortably exceed the growth rate of GDP through 2019.

SWM's SGL-2 Speculative Grade Liquidity rating signifies good liquidity with Moody's expectations for cash in the $40 - $50 million range and annual free cash flow to exceed $50 million, before contributions from future acquisitions. Moody's expects the company to arrange a $500 million senior secured revolving credit facility expiring in 2023. With solid free cash flow, revolving availability is expected to increase from approximately $400 million at transaction close, barring an acquisition that exceeds cumulative free cash flow. The proposed facility is expected to include financial maintenance covenants, including a maximum net leverage ratio and a minimum interest coverage ratio. Following the completion of the proposed financings, the first debt maturity will be in 2023 with only annual amortization payments on the new term loan of less than $2 million.

The rating outlook is stable with Moody's expectations for GDP-level top-line growth highlighted by flat-to-marginally higher Engineered Paper sales and 3%+ organic growth in Advanced Materials & Structures revenues. The stable outlook anticipates margin improvement led by increasing growth opportunities, product innovation and cost reduction initiatives within the Advanced Materials & Structures segment. The stable outlook also anticipates SWM will maintain good liquidity and that if larger debt-financed acquisitions are made, its solid free cash flow will restore balance sheet flexibility relatively quickly.

Higher than anticipated margin expansion and free cash flow, boosted by renewed strength in tobacco-related revenues and/or accelerating growth prospects in the Advanced Materials & Structures end markets could result in an upgrade. Free cash flow-to-debt approaching double-digits and debt-to-EBITDA below 3.5x while executing acquisitions would be important for an upgrade. The ratings could be downgraded if Engineered Papers resumes a sharp decline in results, placing added pressure on Advanced Materials & Structures to generate outsized growth. Additionally, the inability to sustain an EBITDA margin above 18%, debt-to-EBITDA below 4.25x or free cash flow-to-debt above 5% could also lead to negative ratings pressure.

Schweitzer-Mauduit International, Inc. is a producer of specialty materials focused on resin-based nets, films and other non-wovens through its Advanced Materials & Structures segment and fiber-based cigarette papers and reconstituted tobacco products through its Engineered Papers segment. Latest twelve month revenues for the period ending June 30, 2018 were approximately $1 billion.

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's took the following rating actions on Schweitzer-Mauduit International, Inc.:

- Corporate Family Rating assigned at Ba3

- Probability of Default Rating assigned at Ba3-PD

- Senior unsecured notes assigned at B2 (LGD5)

- Speculative Grade Liquidity rating assigned at SGL-2

- Rating outlook stable

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.

Eric Greaser
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

Robert Jankowitz
MD - Corporate Finance
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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