High resin prices show no signs of abating for plastics processors, and that has analysts who follow the packaging industry predicting continued pressure on those companies.
According to New York-based Standard & Poor's financial research, the U.S. economy is expected to remain in mild recession — despite the $168 billion federal stimulus package of personal income tax rebates and tax breaks for businesses investing in new buildings and equipment. The low point for U.S. gross domestic product comparisons with leading world economies will fall early in 2009, S&P reported.
In a July 29 report on the packaging industry, Liley Mehta, S&P's director of corporate and government ratings, said while demand for packaging materials — plastics, paper and glass — in theory is recession-proof, recent earnings trends show lower volumes in rigid and flexible packaging for dairy, beverages and foods.
That's clearly dependent on the price of oil, she said.
``Oil has come down, but it's still over $100 [a barrel],'' Mehta said in a recent telephone interview. ``Thankfully it's not moving up, but the price would have to continue to subside to have a meaningful impact. If it hovers around this level, it will continue to pressure earnings in the third and fourth quarter.''
Packaging suppliers face a double crunch, she said. High gasoline prices, rising food costs and the subprime home mortgage crisis are driving consumers to scale back their spending at the same time resin prices, energy costs and shipping expenses are forcing packaging firms into cost-reduction and productivity-enhancement overdrive.
About 64 percent of all S&P's rated packaging companies are in the highly volatile B categories or lower, after a spate of leveraged buyouts in recent years. Of 28 plastics companies covered by the ratings, four — about 14 percent — are in the C categories, meaning they're highly vulnerable to market vagaries the rest of this year.
Highest of the four C category firms are De Kalb, Ill.-based Tegrant Corp. and Raunheim, Germany-based Treofan Holdings GmbH, both rated CCC+ with a negative outlook, based on liquidity concerns. Debt-plagued Viskase Cos. Inc. of Darien, Ill., has a CCC rating and Batavia, Ill.-based Portola Packaging Corp., which recently announced a prepackaged Chapter 11 bankruptcy with its lenders, is rated CCC-.
Mehta said Portola's rating has remained unchanged since Jan. 16, when it was downgraded from CCC, and that S&P doesn't expect it to change during the restructuring.
The biggest mergers and acquisitions deal of the year so far in North American packaging — Dallas-based Hicks Acquisition Co. Inc.'s $3.2 million buyout of York, Pa.-based Graham Packaging Holdings Co. (rated B with a stable outlook) — hasn't affected S&P's opinion of Graham, Mehta said.
``We don't see any big impasse in terms of business, or financial profile or financial policy. They just continue to pursue their plans and initiatives on product development and on the cost-savings sides,'' she said.
The third quarter has provided no relief even for those plastics companies populating S&P's B-Land. The ratings agency has expressed worries about the operating environment for a number of the heavy hitters in plastics.
On July 16, South Hackensack, N.J.-based AEP Industries Inc. — which hopes a federal bankruptcy court will approve its $87 million bid to buy the film unit of Atlantis Plastics Inc. of Atlanta — had its S&P's rating bumped from B+ with a stable outlook to B+ with a negative outlook. Berry Plastics Corp. of Evansville, Ind., on July 18 went from B to B-.
``Obviously it would be a bidding process, so there's no guarantee [AEP] would get [Atlantis], but just the fact that they're looking to acquire it would put additional pressure on their liquidity, because we claim that would draw on their revolving credit facilities and cash to fund this acquisition,'' Mehta said.
Film giant Pliant Corp. of Schaumburg, Ill., which S&P assigns a B- with a stable outlook, might have its rating lowered if its liquidity declines meaningfully or the company can't address refinancing risks associated with senior secured notes due to mature in 2009, she said.
Tim Burns, a research analyst with Cranial Capital Inc. in Solon, Ohio, said in an Aug. 14 blog that the North American stretch film industry in particular has suffered this year, in what he terms ``a hell's kitchen'' of raw materials price hikes, M&A-related consolidation and inroads in domestic flexible packaging markets made by cheaper Asian film firms.
Burns praised the AEP-Atlantis deal, based on AEP's recent cost-saving measures — including divestitures of its United Kingdom and Dutch business units — as the company expanded its profile in niche and custom markets. But he raised questions about the positioning of top film and sheet firms Berry, Pliant and Sigma Plastics Group of Lyndhurst, N.J.
Sigma founder Alfred Teo Sr. is expected to be released in October after serving 18 months of a 30-month federal prison sentence for securities fraud and insider trading. Teo was fined $1 million in the case, which involved Musicland Stores Corp., where he was the largest shareholder, and Cirrus Logic Inc. of Austin, Texas, where he served as a director.
The case did not involve any Sigma businesses.
Referring to the AEP-Atlantis merger, Burns said, ``The bottom line here is whether the stretch and custom films business can capitalize on this momentous occasion. The obstacles to successful change are a new value pricing model [and] capacity management; adding real value to more and more industry production and repelling imports for what they are: cost-driven, opportunistic purchasing tools.
``A successful combination of AEP and Atlantis Films, the restructuring of Covalence [Specialty Materials Holding Corp.] by Berry Plastics and a compliant Pliant could be a great change toward what the industry segment was: fast-growing, profitable and a fun place to be!'' he said.
Even if plastics packaging companies can streamline and diversify enough to keep their costs down, customer demand isn't likely to pick up soon. S&P economists expect economic growth to lag for much of 2009, rebounding in the latter half of the year and continuing to tick upward through 2010.