Dunn Paper Holdings Inc. was downgraded by Moody's to Caa1 from B3, and its outlook revised to negative from stable, with the rating agency citing the negative impact from higher pulp prices on the company's performance over the past year. The company's secured debt was downgraded as well, with its first-lien secured credit facilities, including its term loan due 2022 (L+475, 1% floor) and revolver, lowered to Caa1 from B3, and its second-lien term loan (L+875, 1% floor) downgraded to Caa3 from Caa2.
Moody's said the downgrade reflects "weak" credit metrics, with leverage above 9x and EBITDA/interest under 1.5x for the 12 months ended September 2021. The agency also noted "near-term refinancing risk and an increasing risk of [a] debt restructuring or distressed exchange" as both the revolver and the first-lien term loan mature less than one year from now, in August 2022.
Moody's said the company had implemented price increases but they had lagged pulp price increases, leading to lower margins and negative free cash flow. The rating agency considers Dunn's liquidity as "weak," noting that as of Sept. 30 the company had no balance sheet cash, $14 million drawn on its $30 million revolver and an agency projection of "limited free cash flow" over the upcoming year. Arbor investments, Dunn's private equity sponsor, contributed equity in the third quarter to avoid a covenant breach.
In September, S&P Global Ratings downgraded Dunn to CCC+ from B- and revised its outlook to negative from stable, with the agency citing negative cash flow, weak liquidity and the upcoming debt maturities. Ratings downgraded the company's secured debt as well, with its first-lien secured credit facilities dropped to CCC+ from B- and its second-lien term loan downgraded to CCC- from CCC.
Dunn Paper manufactures specialty paper primarily used in the food service, flexible packaging, medical and specialty tissue markets. It is owned by private equity firm Arbor Investments.