Fitch Ratings has affirmed
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
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
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
Improving EBITDA: Reynolds' EBITDA could grow to around
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
Deleveraging Capacity, Articulated Financial Policy: Fitch expects FCF in 2023 to be in the mid
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
Parent Subsidiary Linkage: Fitch's analysis includes a weak parent/strong subsidiary approach between the parent and its subsidiary
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
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
2023 FCF could be in the mid
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
Alternatively, should Reynolds undertake portfolio actions that materially increased scale above
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
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 '
Liquidity and Debt Structure
Adequate Liquidity: As of
In addition to the revolver, the company's capital structure includes a
Reynolds' term loan and revolver are guaranteed by wholly owned domestic subsidiaries as well as
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
LT IDR
BB+
Affirmed
BB+
senior secured
LT
BBB-
Affirmed
RR1
BBB-
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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