GORDONSVILLE, VA. (Dec. 1, 2:45 p.m. ET) — Kl"ckner Pentaplast Group's owner is evaluating whether to realign KP's balance sheet “in a precautionary and responsible manner,” a spokeswoman stated.
Credit rating agency Standard & Poor's recently downgraded the long-term corporate credit rating of KP from CCC+ to CCC-. New York equity firm Blackstone Group LP bought KP in 2007 for $1.8 billion.
The credit downgrade was directly made for KP's holding company Kleopatra Lux 1 Sarl of Luxembourg.
“KP is currently meeting its financial obligations,” noted KP spokeswoman Nancy Ryan in an e-mail correspondence. “No covenant breach occurred from 2007 through September 2011 despite challenging economic times. The truth is: covenants remain tight. The key parties are aware of this challenge and are discussing certain scenarios for a financial realignment in a responsible manner.”
“The measures considered now are completely independent from our solid operational performance and do not affect our daily business,” Ryan added.
KP is a major films producer for pharmaceutical, medical, food, electronics, thermoforming, printing and specialties. Its annual sales exceed $1.4 billion and the Montabaur, Germany-based group employs more than 3,000 globally. Among its subsidiaries is Klockner Pentaplast of America Inc. in Gordonsville, Va., where Ryan is based. Processes employed include calendering, extrusion, coating, laminating, orienting, printing and converting.
In a Nov. 23 report, Standard & Poor's analysts said Kleopatra Lux, aka Klockner Pentaplast, will breach its financial covenants because of its weaker-than-expected performance in the financial year to Sept. 30, 2011, and because of tightening covenant test levels. Foreign currency volatility has added more pressure on the company.
“Klockner Pentaplast has a highly leveraged capital structure, which we view as unsustainable,” the report stated. The credit downgrade highlights the risk of a covenant breach and of a debt restructuring in the near term.
EBITDA headroom on the quarterly debt leverage covenant test date as of Sept. 30 was only 0.6 percent, and covenant test levels continue to tighten each quarter, according to S&P.
“Klockner Pentaplast runs a strong and stable business; has a strong liquidity position with plenty of cash on the balance sheet; and solid operational performance,” Ryan countered. “In fact, our sales and operational profitability increased more than 5 percent year-over-year within a challenging economic environment. The KP Group is well positioned within its key international markets. KP is currently meeting its financial obligations.”
S&P stated KP faces significant exposure to volatile input prices. The company had total adjusted debt of about 1.5 billion euros (including preferred equity certificates) as of Sept. 30. S&P thinks KP's debt-to-EBITDA ratio will likely remain about 10 times over the near term.
“We consider these weaknesses to be partly offset by Klockner Pentaplast's niche leading market positions in Europe and North America for polyvinylchloride-based and PET-based rigid film” S&P admitted. “The group also has broad geographic diversity and a diverse customer base.”
S&P said it could consider taking a positive rating action if KP were to restore an adequate cushion of about 15 percent to 30 percent headroom under its financial covenants. Improved free cash flow generation could accelerate a positive move.
“Appropriate measures to manage changes in the economic environment were accounted for when KP was acquired in 2007,” Ryan explained. “Realigning financial structure is a common measure for many companies and a chance to further strengthen KP's foundation. Our stakeholders have fundamental interest in KP's economic success.”