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Moody's upgrades RockTenn to Baa3 from Ba1; outlook stable

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Moody's upgrades RockTenn to Baa3 from Ba1; outlook stable

January 23, 2014 - 20:25

TORONTO, ON, Jan. 23, 2014 (Press Release) -Moody's Investors Service, ("Moody's") upgraded Rock-Tenn Company's (Rock-Tenn) senior unsecured note rating to Baa3 from Ba1. Moody's also withdrew the company's Ba1 corporate family, Ba1-PD probability of default rating and SGL-1 speculative grade liquidity rating, consistent with Moody's ratings practice for investment grade issuers. The rating recognizes Rock-Tenn's improved operating and financial performance and significant debt reduction since the Smurfit-Stone Container Corporation acquisition. The rating outlook is stable.

Upgrades:

  • Issuer: Rock-Tenn Company

    • Senior Unsecured Regular Bond/Debenture Mar 1, 2020, Upgraded to Baa3 from Ba1

    • Senior Unsecured Regular Bond/Debenture Mar 1, 2023, Upgraded to Baa3 from Ba1

    • Senior Unsecured Regular Bond/Debenture Mar 1, 2019, Upgraded to Baa3 from Ba1

    • Senior Unsecured Regular Bond/Debenture Mar 1, 2022, Upgraded to Baa3 from Ba1

Assignments:

  • Issuer: Rock-Tenn Company

    • Issuer Rating, Assigned Baa3

Outlook Actions:

  • Issuer: Rock-Tenn Company

    • Outlook, Changed To Stable From Positive

Withdrawals:

  • Issuer: Rock-Tenn Company

    • Probability of Default Rating, Withdrawn , previously rated Ba1-PD

    • Speculative Grade Liquidity Rating, Withdrawn , previously rated SGL-1

    • Corporate Family Rating, Withdrawn , previously rated Ba1

    • Senior Unsecured Regular Bond/Debenture Mar 1, 2020, Withdrawn , previously rated a range of LGD4, 58 %

    • Senior Unsecured Regular Bond/Debenture Mar 1, 2023, Withdrawn , previously rated a range of LGD4, 58 %

    • Senior Unsecured Regular Bond/Debenture Mar 1, 2019, Withdrawn , previously rated a range of LGD4, 58 %

    • Senior Unsecured Regular Bond/Debenture Mar 1, 2022, Withdrawn , previously rated a range of LGD4, 58 %

RATINGS RATIONALE

Rock-Tenn's Baa3 senior unsecured rating reflects the company's leading market position in corrugated and consumer packaging, an industry characterized by resilient demand and good market discipline amongst few competitors, and the expectation of continued good operating and financial performance following the integration of the Smurfit-Stone acquisition. Moody's expects Rock-Tenn's adjusted debt/EBITDA will drop into the mid-2X range over the next 12-18 months with a modest improvement in operating margins through productivity improvements and slight reduction in debt. Rock-Tenn's ratings are tempered by its exposure to recycled fiber costs (about 45% recycled fiber and 55% virgin fiber) which we expect will remain volatile and trend higher over time. The ratings anticipate that the company will remain acquisitive, but will maintain conservative financial policies that will not significantly pressure its balance sheet or liquidity position.

Rock-Tenn has strong liquidity supported by $36 million of cash (net of restricted cash), about $1.7 billion of aggregate availability (as of September 2013) through a $1.475 billion revolving credit facility that matures in September 2017 and a $700 million receivables based revolving loan that matures in December 2015 and Moody's expectations of approximately $500 million of free cash flow over the next four quarters. The company does not have any sizeable debt maturities over the next year and Moody's expects Rock-Tenn will remain in compliance with its financial covenants over the near term.

The stable rating outlook reflects Moody's expectation that Rock-Tenn will continue to generate strong operating and financial performance and that management will not pressure the company's leverage or liquidity with excessive dividend payouts or share buybacks. We also expect paper packaging price declines will be offset by productivity improvements.

An upgrade will be considered if our assessment of sustainable (RCF-CapEx)/Adjusted Debt is above 15% and adjusted debt to EBITDA below 2.6 times. A downgrade might be associated with deterioration in market demand or pricing. Should Moody's expectations of normalized (RCF-CapEx)/Adjusted Debt decline below 12% or total adjusted debt to EBITDA exceed 3 times, a downgrade would be considered.

The principal methodology used in this rating was the Global Paper and Forest Products Industry published in October 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Norcross, Georgia, Rock-Tenn Company is a leading North American integrated manufacturer of corrugated and consumer packaging, primarily focused on the manufacturing of containerboard, recycled paperboard, bleached paperboard, packaging products and merchandising displays.