S&P Downgrades Rayonier Advanced Materials (RYAM) to 'BB-'; Ratings Removed from CreditWatch

Standard & Poor's Ratings Services said it lowered its corporate credit rating on Rayonier Advanced Materials Inc. (NYSE: RYAM) to 'BB-' from 'BB'. The outlook is stable.

We also lowered the issue-level rating on the company's $550 million senior unsecured notes due 2024 to 'BB-' from 'BB'. The recovery rating on the notes is '3', indicating our expectation for meaningful (lower half of the 50% to 70% range) recovery in the event of payment default.

We removed all the ratings from CreditWatch, where they were placed with negative implications on Sept. 1, 2015.

"Our stable outlook reflects our expectation that Rayonier Advanced Materials will maintain credit measures in line with an aggressive financial risk profile for 2016 based on its recent earnings guidance for the year," said Standard & Poor's credit analyst Thomas Nadramia. "We do expect the company to maintain other cash flow coverage ratios, including EBITDA to interest in the significant range, which lends support to our stable outlook."

We could lower RYAM's rating in 2016 if expected EBITDA levels are not achieved due to lower-than-expected cost savings or operating outages such that debt-to-EBITDA leverage was sustained above 5x and FFO to debt fell below 12%. We could also lower our ratings if RYAM's cellulose and commodity products undergo further demand and price pressure in the latter half of 2016, thereby indicating that 2017 contracted volumes and earnings could deteriorate below expected levels for 2016, resulting in cash flow and leverage ratios reaching the highly leveraged category (i.e., debt to EBITDA greater than 5x, FFO to debt less than 12%, or EBITDA to interest less than 2x).

We could raise our ratings on RYAM over the next year if cellulose fiber demand and pricing recover from current low levels or if earnings and cost saves exceed current expectations, such that the 2017 outlook for the company indicates debt-to-EBITDA leverage would trend below 4.5x in 2017. For this to occur, we estimate gross margins would need to improve about 200 basis points from anticipated 2016 levels and 2017 revenue growth would need to reach 4% or higher.

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