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Moody's Press Release on PORTOLA PACKAGING, Inc.
MOODY'S RAISES PORTOLA PACKAGING'S SENIOR NOTES TO B2 FROM B3; RATINGS OUTLOOK IS POSITIVE Approximately $110.0 Million of Debt Securities Affected New York, 12/9/2002 4:55:52 PM -- Moody's Investors Service revised the ratings and outlook for Portola Packaging, Inc. ("Portola") reflecting the cumulative effects of improved operating and financial performance. The changes reflect Moody's updated assessment of Portola's run-rate financials which have improved significantly since the prior rating. Throughout fiscal 2002, Portola has demonstrated a sustained ability to generate free cash flow and profitability, to improve its margins through cost containment, to manage raw material costs, and to reduce leverage. The following ratings actions were taken: $110 million 10.75% senior unsecured notes, due 2005 raised to B2 from B3 Senior Implied Rating confirmed at B2 Senior Unsecured Issuer Rating raised to B2 from B3 The ratings outlook is positive. The ratings continue to reflect constrained liquidity, high financial leverage - albeit improved, and moderate coverage of interest expense after capital expenditures. In Moody's opinion, the company's liquidity is weak given modest cushion under existing bank covenants (Moody's does not rate the existing bank facility). Effective availability under the $50 million revolver is limited to between $20 million and $30 million given the close proximity to the leverage covenant despite borrowing base availability of approximately $42 million at FYE 8/31/02. Liquidity is further constrained by minimal cash on hand and fully encumbered assets. The ratings reflect significant competition throughout Portola's mature, low growth markets. The ratings also incorporate some concern about the sustainability of margins given rising raw material costs and the push-back on pricing by its customers due to on-going consolidations notably amongst the dairy industry (over 50% of Portola's revenues). More positively, the ratings reflect Portola's enhanced profitability and sustained improvements in its credit statistics, notably greater free cash flow as a percentage of total debt, higher return on assets, and reduced financial leverage. In Moody's opinion, the company appears to have rectified many of its historical operating challenges and has improved efficiency. Global industry trends in conversions to plastics for primarily beverage and food containers are positive and thereby support Portola's new product introductions and backlog. The positive ratings outlook recognizes the cumulative improvements in credit statistics and reflects Moody's expectation of the cost containment efforts gaining traction throughout fiscal 2003. The outlook expresses Moody's expectation of slightly improved cash flow measures relative to total debt. However the outlook also assumes minimal top line improvement yet continued run-rate profitability throughout the intermediate term. There is little tolerance within the positive outlook for adverse fluctuations in financial results. Any material uses of cash, including acquisitions and/or investments in joint ventures or ramp ups in capital expenditures, would likely put downward pressure on the ratings outlook, and more specifically, the rating of the senior notes. At FYE 8/31/02, EBITA return on total liabilities was good at over 12%. Moody's uses return on total liabilities as a proxy for return on assets given the company's deficit equity. EBITA covered interest expense approximately 1.5 times. Financial leverage was high at approximately 6 times EBITA and 3 times EBITDA of approximately $39 million. The change in the rating of the senior unsecured notes to B2 from B3 reflects Moody's assessment of the improvement in Portola's enterprise value which should be sufficient to fully cover the notes. The rating reflects effective subordination to senior debt of approximately $10 million and gives consideration to the level of trade payables and accrued liabilities. Headquartered in San Jose, California, Portola Packaging, Inc. is a designer, manufacturer and marketer of tamper evident plastic closures and related equipment and tooling used for packaging applications in dairy, fruit juice, bottled water, sports drinks, institutional food products and other non-carbonated beverage products. With annual revenues of approximately $210 million, the company has operations throughout the United States and in the United Kingdom, Canada, Mexico, and China, as well as joint ventures in the U.S. and Europe. |
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