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 firm's long-term corporate credit rating from CCC+ to CCC-. New York equity firm Blackstone Group LP bought Kl"ckner Pentaplast in 2007 for $1.8 billion.
The credit downgrade was directly made for Montabaur, Germany-based KP's holding company Kleopatra Lux 1 sarl of Luxembourg.
“KP is currently meeting its financial obligations,” KP spokeswoman Nancy Ryan said via an email. “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,” she added.
KP — a major calendered and extruded films producer for pharmaceutical, medical, food, electronics, thermoforming, printing and specialties — has sales of more than $1.4 billion. Kl"ckner Pentaplast of America Inc. in Gordonsville, Va., where Ryan is based, is among its subsidiaries.
In a Nov. 23 report, S&P analysts said Kleopatra Lux will breach its financial covenants because of weaker-than-expected performance for the fiscal year ended Sept. 30, and because of tightening covenant test levels. Foreign currency volatility has added pressure on the firm.
“Kl"ckner Pentaplast has a highly leveraged capital structure, which we view as unsustainable,” the report said. The credit downgrade highlights the risk of a covenant breach and of a debt restructuring in the near term.
In a separate report on European packaging, S&P said that industry has been relatively recession-resistant in the past, but balance sheets and cash flows among smaller, highly leveraged companies are already stretched from heavy debt burdens and remain under pressure from the economic downturn.
“While we expect investment-grade companies to handle modest volume decreases in their stride, mild erosion in volumes and margins can be a bigger problem for higher-leveraged companies we rate B+ and lower,” said the report, which S&P released in October.
That report, which ranked 11 European packaging companies, said the top two — with BBB- ratings and stable outlooks — were diverse packaging producer Rexam plc and Gerresheimer AG, a plastic and glass products maker for pharmaceutical and medical markets.
As for KP, headroom in earnings before interest, taxes, depreciation and amortization on the firm's quarterly debt-leverage covenant test date as of Sept. 30 was just 0.6 percent, and covenant test levels continue to tighten each quarter, S&P said.
“Kl"ckner 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 that KP faces significant exposure to volatile input prices. The company had total adjusted debt of about 1.5 billion euros ($2 billion) — 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.
But S&P added that those weaknesses are partly offset by KP's niche leading market positions in Europe and North America for its PVC and PET rigid films, and by its diverse geographic reach and customer base.
S&P said it might consider positive rating action if KP restored a cushion of 15-30 percent headroom under its financial covenants. Better free-cash-flow generation could accelerate that move.
“Appropriate measures to manage changes in the economic environment were accounted for when KP was acquired in 2007,” Ryan said. “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.”