WestRock Company’s WRK senior unsecured debt rating has been upgraded to Baa2 from Baa3 by Moody's Investors Service, the rating unit of Moody's Corp. MCO. The upgrade reflects the significant progress made by WestRock by integrating the operations of Rock-Tenn Company and MeadWestvaco Corporation since their merger.
WestRock's leading market position in the corrugated and consumer paper packaging industry and adjusted leverage of about 2.5x also supported the upgrade. In addition, its diverse manufacturing platform across most of the primary packaging substrates of linerboard, bleached paperboard, coated natural kraft and coated recycled board provides operational flexibility to counter some of the supply imbalances in the industry.
WestRock's strong liquidity is supported by $368 million of cash as of Mar 2016, almost full availability on a $2 billion revolving credit facility (slated to mature in Jul 2020) and $329 million available on a $700 million A/R facility (set to mature in Oct 2017). The company, which has $519 million of debt due over the next 12 months, is expected to maintain its financial covenants in the near term.
Notably, Moody's stated that the rating might be raised if adjusted debt/EBITDA approaches 2x and RCF/adjusted debt approaches 30% on a sustained basis. However, there could be a downgrade if adjusted debt/EBITDA exceeds 3x, or RCF/adjusted debt approaches 20% on a sustained basis.
The rating agency also expects WestRock to undertake acquisitions but maintain conservative financial policies in order to avoid pressure on its balance sheet or liquidity position.
The outlook for the aforesaid ratings remained stable, which reflects the rating unit's expectation that the company’s strong operating platform and stable end markets will allow it to maintain or bring a modest improvement in its credit metrics. Moody's also anticipates that improvements in productivity will counter weaker paper packaging prices.
WestRock's free cash flow guidance for fiscal 2016 lies between $950 million and $1 billion. The company delivered a strong financial performance and made progress with regard to synergies and performance improvement goals by realizing $350 million in annual run-rate savings at the end of second-quarter fiscal 2016.
WestRock currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Resolute Forest Products Inc. RFP and Clearwater Paper Corporation CLW, both sporting a Zacks Rank #1 (Strong Buy).
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