S&P Lifts Outlook on Neenah Paper (NP) to Positive; Ratings Affirmed

October 17, 2016 3:46 PM EDT

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&P Global Ratings said today that it affirmed its 'BB' ratings on Neenah Paper Inc. (NYSE: NP) and revised the rating the outlook to positive from stable. The recovery rating on the company's $175 million senior unsecured notes remains '3', indicating our expectation for meaningful (the high end of the 50%-70% range) recovery to debtholders in the event of default.

Our outlook revision recognizes several factors:

  • The realization of cost synergies from the Fibermark acquisition;
  • Favorable sales growth in both legacy and integrated Fibermark products through the first half of fiscal 2016;
  • Improving EBITDA margins and better cash-flow generation, allowing the company to pay-down revolving debt balances, pushing debt to EBITDA below 2x on a last-12-month basis; and
  • The company's continued transition toward growing its technical products business.

We believe that these trends could support an upgrade in the next 12 months, assuming Neenah's leverage remains around 2x and the build-out of its auto filtration capacity boosts top-line growth beginning in 2017.

Alpharetta, Ga.-based Neenah Paper Inc. is a specialty paper manufacturer that operates two main business segments: technical products (filtration, tape, backings, and labels) and fine paper and packaging (including various printing, premium packaging, and specialty paper products). While its production and the vast majority of its sales are in the U.S., the company does have some international presence (about 23% of total sales in 2015). Our 'BB' corporate credit rating on Neenah reflects what we consider to be an intermediate financial risk profile combined with a weak business risk profile. Although we assess Neenah's business risk profile as weak, we recognize that it has improved as the company has diversified over time and is now less concentrated in mature, and in some cases declining, printing and writing paper products. We view the company's technical products segment as having stronger prospects for long-term growth and more stable operating margins. Although Neenah is smaller than some other rated paper and forest product industry peers in terms of revenues and market capitalization, it has solid shares of some if its more specialized, niche markets, and it maintains EBITDA margins (roughly 18% for 2016 through June 30) and returns that we view as being on par with those of its peers.

Our view of the company's financial risk profile takes into account a track record of conservative balance-sheet management and our baseline forecast of adjusted debt to EBITDA remaining within the range of 1.8x to 2x through fiscal 2017. We believe management's publicly stated financial policy is consistent with our financial risk assessment and that any M&A activity, internal investment, or returns to shareholders will be funded largely via cash-flow generation and will not have a material impact on leverage. We also maintain our view of the company's liquidity as exceptional due to its low level of operational cash requirements.

The positive outlook recognizes the company's improved profitability and debt leverage. It also reflects Neenah's continued shift toward the growth-oriented and more profitable technical products business and specialty paper applications.

We could upgrade Neenah over the next 12 months if it continues to show organic revenue growth and EBITDA improvement derived from products we view as being focused in growth-oriented markets, improvement of leverage and profit margins such that adjusted debt to EBITDA is maintained at around 2.0x, or a combination of these factors.

At this time, we consider a downgrade to be unlikely over the next 12 months. However, we would consider revising the outlook back to stable if there were a leveraging event, such as a large debt-financed acquisition that caused debt to EBITDA to climb toward 3x. We could also revise the outlook to stable if input costs or other factors erode profitability such that our expectation for the company's business risk profile to improve becomes questionable.

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