Fitch Ratings has affirmed Reynolds Consumer Products LLC (Reynolds) and Reynolds Consumer Products Inc.'s Long-Term Issuer Default Rating (IDR) at 'BB+' and the 'BBB-'/'RR1' rating on its first lien secured facilities, including its revolving credit facility and term loan.

The Rating Outlook is Stable.

Reynolds' rating reflects its leading market position in the categories in which it participates, its strong innovation pipeline, and Fitch's expectation that Reynolds' EBITDA leverage (total debt/EBITDA) will be in the low to mid 3x range over the next 24 months versus 3.8x in 2022 driven by EBITDA improvements and debt repayment.

Pricing actions taken in 2022 combined with improved operations in the company's Cooking & Baking segment should drive improvements in margin and cash flow in 2023, supporting the company's ability to reduce debt and continue investing in the business.

Key Rating Drivers

Leading U.S. Market Share, Category Innovator: Reynolds holds a number one or two U.S. market share position in the majority of product categories in which it participates. Most notably, the company has the largest market share in the consumer aluminum foil markets in both the U.S. and Canada. The company leverages its suite of both branded and private label offerings, allowing it to maintain an integral, prominent, and defensible shelf space position with its retail partners. The company has three main product groups: waste and storage (around 40% of 2022 sales), cooking products (around 34%), and tableware (around 26%).

Over 65% of Reynolds' 2022 revenue was attributed to products where the company held the leading market share position in the category. Reynolds has also been an innovation leader within the general industry, particularly for a mature market with high levels of competition, through the introduction of several refreshes and value-added features to traditional products to address consumer needs.

Limited Diversification and Scale: Relative to investment-grade peers, Reynolds' smaller scale and diversification results in reduced ability to navigate macro-economic or idiosyncratic challenges. Reynolds, whose performance is largely driven by two brands (Reynolds and Hefty), lacks the size and breadth of portfolio to that of larger consumer goods companies with more diversified portfolios that may include cleaning agents, personal care, and health and wellness segments.

Reynolds' scale, measured by EBITDA, supports its 'BB+' rating; however, at EBITDA of around $600 million forecast for 2023, it is smaller than what Fitch would expect for an investment-grade consumer goods company.

Flat Sales in 2023: Reynolds experienced a surge in demand across all segments during the pandemic, driven by increased consumption at home. Growth between 2020 and 2022 averaged 8% annually, driven primarily by volume increases in 2020 and pricing actions to offset inflation in 2021/2022. Fitch expects sales could be flat in 2023, as the impact of pricing actions taken in 2022 offsets volume declines from elasticity and as consumers return toward pre-pandemic levels of activity outside of the home.

Over the medium term, Reynolds could sustain revenue in the high $3 billion to low $4 billion range on low single digit organic growth, compared with revenue of around $3 billion in 2019.

Improving EBITDA: Reynolds' EBITDA could grow to around $600 million in 2023, on margins in the mid 15% range, up from EBITDA of around $558 million in 2022 (14.6% EBITDA margin). This compares with EBITDA of approximately $660 million at 21.7% margins in 2019. The impact of pricing actions in 2022 should cover inflationary pressures the company has been facing and support margin improvement in 2023, with several segments already recovering toward pre-pandemic profitability on a dollar value basis.

The company experienced challenges in its Cooking & Baking segment in the second half of 2022 and early 2023; however, Fitch believes that the company has largely corrected the issues. EBITDA could recover to pre-pandemic levels of around $650 million in 2024/2025, but Fitch does not anticipate a return to pre-pandemic margins in the near-to-medium term given higher cost structures, increased promotional activity and ongoing reinvestments in the business.

Deleveraging Capacity, Articulated Financial Policy: Fitch expects FCF in 2023 to be in the mid $100 million range, supported by working capital improvements, after FCF outflow of $23 million in 2021 and $101 million in 2022. FCF is expected to be in the $100 million to $150 million range thereafter. FCF could be used toward debt repayment, further reinvestment in the business and tuck in acquisitions.

Fitch expects that the company's EBITDA leverage could decline from 3.8x in 2022 to the mid 3x area in 2023 and toward the low 3x range thereafter given strong cash flows and EBITDA recovery. Reynolds has consistently de-levered since emerging from its 2020 IPO; through 2020 and 2021, the company made $300 million of voluntary term loan prepayment, demonstrating both willingness and capacity to delever toward its post-IPO commitment of a net debt leverage target of 2.0x to 2.5x, which translates to Fitch-calculated gross leverage (total debt/EBITDA) of about 2.5x to 3.0x.

Parent Subsidiary Linkage: Fitch's analysis includes a weak parent/strong subsidiary approach between the parent and its subsidiary Reynolds Consumer Products, LLC. Fitch assesses the quality of the overall linkage as high that results in an equalization of IDRs across the corporate structure.

Derivation Summary

Reynolds' 'BB+'/Stable rating reflects its leading market position in the categories in which it participates, its strong innovation pipeline, and Fitch's expectation that Reynolds will reduce Fitch-calculated leverage (total debt/EBITDA) to the low-3x area over the next 24 months, given strong cash flows and EBITDA recovery. The company's exposure to raw material prices as well as weakness in the Cooking & Baking segment resulted in recent earnings volatility and a meaningful contraction in its margins. Fitch expects EBITDA margins to recover gradually to the 16% level by 2024, with price increases and easing of commodity pressures. The rating also considers Reynolds' limited scale and diversification compared against its larger, well capitalized CPG competitors.

Similarly rated credits in Fitch's consumer portfolio include Newell Brands Inc (Newell; BB-/Negative), Levi Strauss & Co. (Levi; BB+/Stable), Tempur Sealy International Inc. (Tempur Sealy; BB+/RWN), ACCO Brands Corporation (ACCO; BB/Stable), and Central Garden & Pet Company (Central; BB/Stable). Reynolds' scale, measured by EBITDA, is larger than ACCO and Central, but smaller than Newell, Levi and Tempur Sealy, while leverage could be higher than Levi, in line with Central, and lower than ACCO, Newell and Tempur Sealy.

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer Include:

2023 sales are expected to be flat compared with 2022, with pricing increases largely offsetting volume declines. Growth could be in the low-single-digit range thereafter, given its low-growth, mature markets;

EBITDA is expected to be around $600 million in 2023 versus $558 million in 2022. The impact of pricing actions to combat inflationary pressures and recovery in the Cooking & Baking segment could support EBITDA margins expanding to the mid 15% range in 2023 compared with around 14.6% in 2022. Margins could improve to the 16%-17% range in 2024 and thereafter;

2023 FCF could be in the mid $100 million range in 2023, driven by EBITDA improvement and improved working capital. FCF generation over 2024-2026 to be strong at approximately $100 million to $150 million annually, supported by EBITDA recovery, reflecting capex in the range of 3%-4% of sales and annual dividends of around $200 million. Fitch expects Reynolds could deploy cash toward debt repayment, reinvestment in business to support organic growth, and bolt-on acquisitions;

Leverage (total debt/EBITDA) is anticipated to decline to the mid-3x range in 2023 on EBITDA improvement and debt pay down. Leverage could decline toward the low 3x range in 2024, supported by EBITDA growth and debt repayment;

Base interest rates in the 550bps to 400bps range across the rating horizon, with annual interest expense offset by the company's interest rate hedges.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade could be considered if the company exhibited low single digit organic growth such that EBITDA approached $700 million, with gross EBITDA-leverage sustained below 3.0x;

Alternatively, should Reynolds undertake portfolio actions that materially increased scale above $1 billion in EBITDA, Fitch could upgrade Reynolds to 'BBB-' if EBITDA-leverage is sustained under 3.5x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA-leverage sustained above 4.0x as a result of financial performance below Fitch's expectations yielding EBITDA sustained in the low $500 million range;

A change in financial policy or a transformative debt-funded acquisition absent a clear path to deleveraging to below 4.0x within 24 months of acquisition close could also lead to negative rating actions.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: As of March 31, 2023, Reynolds had total liquidity of $293 million, including cash and cash equivalents of $50 million and $243 million available under its $250 million secured revolving credit facility due in February 2025, net of $7 million of LOCs outstanding.

In addition to the revolver, the company's capital structure includes a $2.475 billion first lien secured term loan facility maturing in February 2027. The Term Loan Facility amortizes in equal quarterly instalments of $6 million. Through 2020 and 2021, the company made a total voluntary prepayment of $300 million toward the term loan, and $24 million quarterly payments in 2022, leaving approximately $2.1 billion in principal remaining as of Mar. 31, 2023.

Reynolds' term loan and revolver are guaranteed by wholly owned domestic subsidiaries as well as Reynold Consumer Products Inc., and secured by a first priority pledge of all equity interests held by the borrower and guarantors, and priority security interest in all other assets.

Recovery Considerations: Fitch has assigned Recovery Ratings (RRs) to the various debt tranches in accordance with Fitch criteria, which allows for the assignment of RRs for issuers with IDRs in the 'BB' category. Given the distance to default, RRs in the 'BB' category are not computed by bespoke analysis. Instead, they serve as a label to reflect an estimate of the risk of these instruments relative to other instruments in the entity's capital structure. Fitch has assigned the first-lien credit facilities (term loan and revolver) a 'BBB-'/'RR1' rating, indicating outstanding recovery prospects post default.

Issuer Profile

Reynolds produces and sells cooking products, waste and storage products, and tableware under brands such as Reynolds and Hefty as well as store brands. The product portfolio includes aluminum foil, wraps, disposable bakeware, trash bags, food storage bags and disposable tableware.

Summary of Financial Adjustments

Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and exclude non-recurring charges.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

RATING ACTIONS

Entity / Debt

Rating

Recovery

Prior

Reynolds Consumer Products LLC

LT IDR

BB+

Affirmed

BB+

senior secured

LT

BBB-

Affirmed

RR1

BBB-

Reynolds Consumer Products Inc.

LT IDR

BB+

Affirmed

BB+

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VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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