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TEXT-S&P: Appleton Papers off watch positive, ratings affirmed
July 16, 2012 / 2:48 PM / 5 years ago

TEXT-S&P: Appleton Papers off watch positive, ratings affirmed

Overview
     -- U.S. paper producer Appleton Papers Inc. announced that its planned 
merger with unrated Hicks Acquisition Co. II Inc. has been terminated due to 
unfavorable market conditions.
     -- It is now less likely that Appleton will quickly reduce leverage 
without the equity infusion that would have accompanied the previously 
proposed merger.
     -- We affirmed our ratings on the company, including our 'B' corporate 
credit rating, and removed all ratings from CreditWatch positive.
     -- The stable rating outlook is based primarily on our view that Appleton 
will continue to generate modest positive free operating cash flow and 
maintain its adequate liquidity profile.

Rating Action
On July 16, 2012, Standard & Poor's Ratings Services affirmed its ratings on 
Appleton, Wis.-based Appleton Papers, including the 'B' corporate credit 
rating. All ratings were removed from CreditWatch where they were placed with 
positive implications on May 18, 2012. The outlook is stable.

Rationale
We removed our ratings on Appleton from CreditWatch positive after the company 
announced that its proposed merger with unrated Hicks Acquisition Co. II Inc. 
has been terminated due to unfavorable market conditions. It is now less 
likely that Appleton will quickly reduce leverage without the equity infusion 
that would have accompanied the previously proposed merger.

The 'B' rating on Wisconsin-based Appleton Papers Inc. reflects our view that 
the paper manufacturer's financial risk profile will remain highly leveraged 
despite our expectation for slightly lower debt levels and EBITDA 
improvements. The rating also incorporates our opinion that the company 
maintains an adequate liquidity position, given that it has no significant 
near-term debt maturities or financial maintenance covenant requirements. We 
continue to view Appleton's business risk to be "weak", primarily due to the 
long-term decline in demand for the company's core carbonless paper products, 
which account for over 50% of its sales. 

Appleton is an employee-owned firm and one of two primary manufacturers of 
carbonless paper, which is used for multipart forms such as credit card 
receipts, invoices, and packing slips. The company also manufactures thermal 
papers and is expanding into the specialty chemical and delivery solutions 
market through its proprietary Encapsys technology. 

We expect Appleton to remain highly leveraged in the near term, with some 
improvement over currently high levels (near 8x during the 12 months ended 
March 31, 2012). Our baseline scenario for the 2012 fiscal year assumes that 
revenues grow 2%, EBITDA improves to roughly $100 million, and leverage 
recedes modestly but remains above 5x for the full fiscal year. Key 
assumptions under our baseline scenario include:

     -- Demand for carbonless paper softens and raw material costs remain 
elevated,
     -- Appleton realizes higher selling prices and increased sales in other 
business segments, and
     -- Margins gradually improve due to the new paper supply agreement with 
Domtar and the closing of an unprofitable paper plant.

Liquidity
We view Appleton to have an adequate liquidity profile based on the following 
observations and assumptions:

     -- We expect that sources of liquidity will cover anticipated uses by at 
least 1.2x over the next 12 months.
     -- We expect that sources would fully cover uses even with a 15% drop in 
EBITDA.
     -- We do not anticipate that average availability under Appleton's asset 
backed revolving credit facility will fall below 20% over the next 12 months.

Sources of liquidity include $7 million of cash on March 31, 2012 and $79 
million available under its $100 million asset-backed revolving credit 
facility due 2015 (adjusted for borrowing base limitations and letters of 
credit). Based on our operating assumptions, we expect the company to generate 
$10 million to $30 million of free operating cash flow in fiscal 2012, after 
an estimated $20 million of capital expenditures. Other uses could include 
about $10 million of common share redemptions and less than $2 million of 
principal amortization. Notably, Appleton does not face a debt maturity until 
$32 million of subordinated notes come due in 2014.

Appleton eliminated certain financial covenants when it refinanced its debt in 
2010. However, the $100 million asset-backed revolving credit facility is 
subject to a springing fixed-charge coverage ratio if average availability 
under the facility were to fall below 20%. While we do not anticipate that 
Appleton's line usage will increase substantially in 2012, we estimate that 
the company's fixed-charge covenant would remain above the potential 1.1x 
minimum threshold.

Recovery analysis
For our full recovery analysis on Appleton, see our recovery report published 
on RatingsDirect on Feb. 29, 2012.

Outlook
The stable rating outlook is based primarily on our view that Appleton will 
continue to generate modest positive free operating cash flow and maintain its 
adequate liquidity profile. As our baseline assumptions suggest, we expect the 
company to remain highly leveraged in the near term, which limits the 
potential for an upgrade over the next 12 months. 

However, we could raise our rating over the longer term if EBITDA grows more 
substantially (perhaps by more than 30%) due to new customers and higher 
contractual revenues in the Encapsys segment and if Appleton uses its free 
cash flow to reduce debt such that leverage was maintained below 5x. We would 
also raise our rating if Appleton deleveraged by other means, such as an 
alternative merger opportunity or an initial public offering.

Conversely, we could lower our ratings if operating conditions worsened and we 
no longer viewed Appleton's liquidity to be adequate. This could occur, in our 
view, if free operating cash flow were to turn sharply negative (perhaps as a 
consequence of a double-dip recession) such that sources of liquidity were no 
longer expected to cover needs by less than 1.2x.

Related Criteria And Research
     -- Industry Economic And Ratings Outlook: Stiffer Headwinds Are On The 
Horizon For Some U.S. Natural Resources Companies, Though Most Outlooks Hold 
Stable For Now, July 13, 2012.
     -- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity 
Descriptors For Global Corporate Issuers, July 2, 2010.
     -- Key Credit Factors: Criteria For Rating The Forest Products Industry, 
Dec. 11, 2009.
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008.
Ratings List
Ratings Affirmed; Off CreditWatch; Outlook Stable
                                        To                 From
Appleton Papers Inc.
 Corporate Credit Rating                B/Stable/--        B/Watch Pos/--
 Senior Secured                         B+                 B+/Watch Pos
   Recovery Rating                      2                  2
 Senior Secured                         CCC+               CCC+/Watch Pos
   Recovery Rating                      6                  6
 Subordinated                           CCC+               CCC+/Watch Pos
   Recovery Rating                      6                  6



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

Our Standards:The Thomson Reuters Trust Principles.
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