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Rating Action:

Moody's downgrades Dunn Paper Holdings' CFR to Caa1, outlook negative

23 Nov 2021

New York, November 23, 2021 -- Moody's Investors Service ("Moody's") downgraded the corporate family rating (CFR) of Dunn Paper Holdings, Inc.("Dunn Paper") to Caa1 from B3 and the probability of default rating to Caa1-PD from B3-PD. Moody's also downgraded the instrument ratings (see list below). The rating outlook changed to negative from stable. The downgrade reflects weak liquidity and credit metrics as higher pulp prices have negatively impacted the company's performance in the past twelve months. The downgrade also reflects refinancing risk and increasing risk of restructuring or a distressed debt exchange with both the revolver and the first lien term loan maturing in August 2022.

Downgrades:

..Issuer: Dunn Paper Holdings, Inc.

.... Corporate Family Rating, Downgraded to Caa1 from B3

.... Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

....Senior Secured First Lien Term Loan, Downgraded to Caa1 (LGD3) from B3 (LGD3)

....Senior Secured Second Lien Term Loan, Downgraded to Caa3 (LGD5) from Caa2 (LGD6)

....Senior Secured Revolving Credit Facility, Downgraded to Caa1 (LGD3) from B3 (LGD3)

Outlook Actions:

..Issuer: Dunn Paper Holdings, Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

The Caa1 CFR reflects weak credit metrics (debt/EBITDA of over 9x and EBITDA/Interest of under 1.5x in the twelve months ended September 2021, as adjusted by Moody's and not including management fees or other adjustments allowed by the company's credit agreement), negative free cash flow and weak liquidity. The CFR also reflects near-term refinancing risk and an increasing risk of debt restructuring or a distressed exchange. As a small non-integrated producer of specialty packaging paper and tissue products (the company only produces 20% of its pulp needs), Dunn Paper has been negatively impacted by price increases in pulp, its main raw material, and recycled fiber, such as sorted office papers. The company's announced price increases to non-indexed customers have lagged pulp price increases and have resulted in lower margins and negative free cash flow. The rating also reflects private equity ownership and the company's small scale and limited growth over the last five years due to competitive pressures in the machine-grazed segment and demand declines due to the pandemic.

The credit profile benefits with the company's diversification to tissue (about 50% of sales), which allowed the company to mitigate the negative impact of the coronavirus pandemic on it machine-glazed volumes.

The company's owner, Arbor Investments, contributed equity to avoid a covenant breach and a default in the third quarter just six months after amending the revolver to provide more headroom under the covenants. Although the company announced additional price increases, pulp prices began to decline and volume trends for both tissue and machine-glazed paper are positive, the company has little room for negative variance in operating performance. The company has engaged an advisor to help it with refinancing efforts.

As a specialty paper manufacturer, Dunn Paper faces modest environmental and social risks. Moody's believes Dunn Paper has established expertise in complying with environmental and business risks and has incorporated procedures to address them in its operational planning and business models, including secondary fiber usage in paper, recycled tissue production and introduction of fluorocarbon-free paper.

Moody's views Dunn Paper as having weak liquidity. The company had no cash as of September 30, 2021 and $14 million drawn on the $30 million revolver which matures in less than 12 months on August 26, 2022. Moody's projects that the company will generate limited free cash flow over the next 12 months. The first lien term loan also matures in August 2022 and the second lien term loan matures in August 2023. The company has no headroom under the 6.75x leverage covenant following the equity cure provided by the sponsor in the third quarter of 2021. The company needs to significantly improve its earnings to avoid breaching the covenant, which steps down 0.25x each quarter starting in March 31, 2022. The credit agreement allows for one cure right in two consecutive quarters. All assets are encumbered by secured credit facilities.

Negative rating outlook reflects weak liquidity, little room for negative variance in operating performance and increasing risk of restructuring or a distressed exchange.

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

We could stabilize the outlook and upgrade the rating, if the company refinances its capital structure and improves the maturity profile beyond the next few years. An outlook change and an upgrade would also depend on improved liquidity and credit metrics, specifically Debt/EBITDA below 6x and expectation of positive free cash flow.

We could downgrade the rating if the company fails to refinance its upcoming maturities or restructures its debt.

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.

Headquartered in Alpharetta, GA, Dunn Paper manufactures a broad range of lightweight food packaging paper as well as absorbency and specialty tissue products. The company operates seven mills with annual capacity of 270,000 tonnes of specialty paper and tissue products. The company generated approximately $342 million of sales for the twelve months ended September 30, 2021. The company is privately owned (Arbor Investments acquired Dunn Paper in August 2016) and does not publicly disclose financial information.

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_1288235.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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 - Senior 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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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