DBRS Confirms Cascades Inc. at BB, Trend Stable

DBRS has today confirmed the Issuer Rating of Cascades Inc. (Cascades or the Company) at BB with a Stable trend. The rating confirmation reflects that the Company has performed as expected, with modestly stronger results in 2013, and as a result, credit metrics improved and are now more in line with the current rating. The Stable trend reflects DBRS’s expectation that the Company’s credit metrics will stay within the current rating range going forward, with modest improvement in operating results. The improvements in operating results are based on DBRS’s expectations that weaker results in the Company’s tissue business and specialty products will likely be more than offset by stronger results in its containerboard business.

DBRS has also confirmed the recovery ratings of Cascades’ Senior Unsecured Debt at RR4. As a result of the base Issuer Rating’s confirmation at BB with a Stable trend, the RR4 on the senior unsecured notes corresponds to a BB rating with a Stable trend.

Cascades performed as expected in 2013 with modestly stronger operating results, as higher sales volume, lower energy costs and a weaker Canadian dollar more than offset lower selling prices and mix, and higher raw material costs. Specifically, higher sales volumes were mainly driven by higher shipments in containerboard, higher European boxboard demand and higher tissue shipments as a result of growth in the U.S. retail business. On the other hand, lower selling prices were mainly attributed to weaker boxboard market conditions related to a challenging European economy and competitive market conditions in the tissue business. Higher raw material costs mainly arose from additional paper purchases in containerboard.

Going forward, DBRS expects Cascades’ 2014 operating results to be modestly stronger compared with 2013, and for the resulting credit metrics to remain in line with the current rating. The improvement in results are based on DBRS’s expectation of stronger results in containerboard, which will likely more than offset weaker results in tissue and specialty products, while boxboard remains close to the 2013 levels. Stronger results in containerboard products are expected to be driven by higher volume and higher selling prices and mix mainly because of better market conditions, in line with an improving U.S. economy. Weaker results in tissue are expected to be driven by lower selling prices and mix mainly because of additional industry capacity. Reduced results in specialty products are expected following the sale of its fine papers activities (announced on July 1, 2014) and the closure of its Kraft paper manufacturing activities (announced on July 9, 2014). Moreover, recovered paper prices could be lower in 2014 as a result of a possible slowdown in China’s economy.

The Company is committed to its modernization program and is making progress in executing its strategic action plan to improve its operations. Benefits from these restructuring initiatives and modernization efforts should improve the Company’s competitiveness and would position it for a stronger recovery in earnings. However, ongoing investments to upgrade the facilities will keep capital expenditures at elevated levels. In terms of cash flow, internal cash generation is expected to improve in line with earnings, and DBRS expects that the Company will generate free cash flow in 2014. DBRS also expects that the Company will be able to meet all of its funding needs and has no concerns about the Company’s liquidity.

Moreover, with the most recent refinancing announcements, Cascades greatly improved its financial flexibility (i.e., the next senior notes repayment date is in 2020). Specifically, on June 19, 2014, Cascades announced the notice of redemption for all of its 7.75% Senior Notes due 2017 and 7.75% Senior Notes due 2016, which will be funded using the proceeds of its previously completed private offering of USD 550 million aggregate principal amount of 5.50% Senior Notes due 2022 and CAD 250 million aggregate principal amount of 5.50% Senior Notes due 2021.

In the medium to long term, DBRS expects the Company’s credit metrics to continue to improve in the next few years, mainly driven by better market conditions, in line with an improving U.S. economy. Cascades’ current ratings are expected to remain unchanged in the foreseeable future.

DBRS has simulated a default scenario for Cascades in order to analyze the potential recovery of the Company’s senior unsecured notes in the event of default. The scenario assumes a prolonged period of severe economic conditions, regardless of how hypothetical or unlikely the conditions may be, in which product demand and prices plummet, and EBITDA quickly declines and turns negative over the forecast period. DBRS assumes that the Company would be reorganized as a going concern in the event of default and has derived a recovery rating of RR4 for the Senior Unsecured Debt. The RR4 rating corresponds to recovery prospects between 30% and 60% for senior unsecured debtholders.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Forest Products Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.