OREANDA-NEWS. S&P Global Ratings said today that it has assigned its 'B-' corporate credit rating to Fort Dearborn Holding Co. Inc. The outlook is stable.

At the same time, we assigned our 'B-' issue-level rating and '3' recovery rating to the company proposed secured first-lien bank facility and our 'CCC' issue-level rating and '6' recovery rating to its proposed secured second-lien bank facility. The '3' recovery rating indicates our expectation for meaningful recovery (50%-70%; lower end of the range) for lenders in the event of a payment default, while the '6' recovery rating indicates our expectation for negligible recovery (0%-10%) in the event of a payment default. Both facilities were borrowed under financing subsidiary Fortress Merger Sub Inc. (which we expect will eventually be merged into Fort Dearborn Holding Co. Inc.). The facilities comprise a $75 million revolving facility due 2021, a $455 million first-lien term loan due 2023, and a $170 million second-lien term loan due 2024.

"Our rating on Fort Dearborn reflects the company's very high debt leverage at the outset of this transaction along with our concern that its new financial sponsor, Advent International, will impose aggressive financial policies over the intermediate term," said S&P Global credit analyst James Siahaan. We anticipate that the company's adjusted debt-to-EBITDA will be greater than 7.5x by the end of 2016, which is higher than the debt leverage of many other financial sponsor-owned companies in the packaging sector. This amount of debt in relation to the company's level of adjusted EBITDA leads us to apply a negative one-notch comparable rating analysis adjustment to our anchor on Fort Dearborn. This weakness is partially offset by the company's solid free cash generation and fixed charge coverage, its participation in the recession-resistant food, beverage, and personal care markets, and its satisfactory profitability with the potential for operational improvements.

The stable outlook on Fort Dearborn reflects our expectation that the demand in the company's end markets, management's operational improvement initiatives, and the contributions from its recently acquired businesses will allow the company to maintain credit measures that are appropriate for the current rating while retaining adequate liquidity. Specifically, we view an adjusted debt-to-EBITDA metric of 6.0x-7.0x and an EBITDA-to-interest coverage ratio of more than 2.0x as appropriate. While the company's credit measures may be stretched at the inception of the transaction, we expect some deleveraging to occur in the next year and believe that they will moderate to appropriate levels for the current rating.

We could raise our ratings on Fort Dearborn if the company establishes a track record of disciplined financial policies and reduces its debt leverage by more than we currently expect in our base-case scenario, either by applying its free cash flow to reduce its prepayable term loan balances or by increasing its EBITDA. If the amount of deleveraging is substantial, we could reassess our comparable rating analysis modifier on the company to neutral, which would lead us to undertake a one-notch upgrade. We see an adjusted debt-to-EBITDA ratio of 5.0x-6.0x as being appropriate for a modestly higher rating.

While less likely, we could lower our ratings on Fort Dearborn if the company encounters unexpected operational challenges or undertakes large debt-financed acquisitions or shareholder rewards that cause its adjusted debt-to-EBITDA to exceed 7.5x without clear prospects for improvement. This could occur if a particularly severe recession hurts the demand from its customers, or if they become more willing to sacrifice the speed and low cost of cut and stack labels in favor of pressure sensitive labels, which is a segment where Fort Dearborn has less of a presence. These conditions could cause its adjusted EBITDA margins to contract by more than 200 basis points while its top line contracts by 1% (instead of growing by roughly 4% as we expect in our base-case assumptions). We could also lower the ratings if the company's cash flow diminishes significantly or its liquidity becomes constrained.