Sonoco Products Company — Moody’s affirms Sonoco’s Baa2 senior unsecured rating

Rating Action: Moody’s affirms Sonoco’s Baa2 senior unsecured ratingGlobal Credit Research – 07 Jan 2022New York, January 07, 2022 — Moody’s Investors Service (“Moody’s”) affirmed the Baa2 senior unsecured rating and P-2 short-term rating of Sonoco Products Company (“Sonoco”). The rating outlook is stable. The affirmation reflects our expectations that Sonoco will be able to return leverage metrics in line with the rating by the end of 2023 after it completes the proposed $1.35 billion debt-financed acquisition of Ball Metalpack (B3, RUR-UP). Sonoco expects the transaction, which is subject to customary closing conditions and regulatory review, to close in the first quarter of 2022. The company has secured a bridge facility and intends to replace it with permanent debt financing.Affirmations:..Issuer: Sonoco Products Company….Commercial Paper, Affirmed P-2….Senior Unsecured Shelf, Affirmed (P)Baa2….Senior Unsecured Regular Bond/Debenture, Affirmed Baa2Outlook Actions:..Issuer: Sonoco Products Company….Outlook, Remains StableRATINGS RATIONALESonoco’s Baa2 senior unsecured rating reflects the company’s leading positions in paper-based consumer and industrial packaging, a balanced portfolio that ensures margin stability through the economic cycles and management’s commitment to investment-grade rating. The proposed acquisition of food can and aerosol manufacturer Ball Metalpack will further improve the company’s scale to about $6.3 billion from $5.5 billion in the twelve months ended October 3, 2021 and increase Sonoco’s exposure to the more stable consumer packaging end market to about 50% of sales from 43%. Moody’s expects Ball Metalpack, which has been a joint venture between Platinum Equity and Ball Corporation since 2018, to contribute to Sonoco’s projected improved free cash flow generation in 2022. While the acquisition further diversifies Sonoco’s product offerings, it adds some complexity (managing tinplate raw material costs) and initially depresses Sonoco’s margins, which are already lower than other Baa2 rated paper packaging peers. Sonoco previously owned some of the facilities that Ball Metalpack currently operates, which reduces some integration risks. Sonoco expects to realize $20 million of annual synergies from procurement and SG&A over three years after acquiring Ball Metalpack. Sonoco also said it expects to realize tax benefits with an expected net present value of $180 million from the acquisition.Sonoco’s credit rating is constrained by weak pro forma leverage, low organic growth rates in the mature core markets, including the food can business of Ball Metalpack, and exposure to raw material volatility. Pro forma for the proposed acquisition, Sonoco’s leverage as adjusted by Moody’s will increase to 3.6x in the twelve months ended October 3, 2022 from 2.6x. Moody’s expects the company to return leverage below 3x by the end of 2023 through a combination of earnings growth and debt repayment. Moody’s expects Sonoco legacy earnings to improve in 2022 on announced price increases for uncoated recycled paperboard (URB) and converted consumer and industrial products. The company will also continue to focus on operational improvements and could see some volume gains from its completed acquisitions and growing demand for more sustainable packaging. Moody’s also expects Ball Metalpack earnings to increase on new business wins and pass-through of raw material cost increases. Stronger earnings and reduction in pension related payments should support free cash flow generation and deleveraging despite higher capex in 2022 as Sonoco proceeds with its Project Horizon paper machine conversion to URB. Moody’s expects Sonoco to continue to increase its dividends, but to suspend share repurchases ($138 million remaining under $350 million authorization) until it returns leverage to pre-acquisition levels. Moody’s also believes Sonoco’s portfolio of businesses provides flexibility and ability to raise cash to continue to de-lever.Moody’s expects Sonoco to maintain excellent liquidity over the next 12 months. The company had $160 million of cash on hand as of October 3, 2021. Sonoco has a $500 million commercial paper program, supported by a $750 million credit facility that matures in June 2026. Cash on hand, revolver availability ($548 million available as of October 3, 2021) and cash from operations will cover cash needs, including over $300 million in capex and over $190 million in dividends. There are no near-term maturities. Sonoco is subject to financial maintenance covenants under the credit facility including a minimum net worth covenant and EBITDA interest coverage test. As of October 2021, Sonoco had significant cushion under its covenants and we expect the company to remain in compliance over the next 12 to 18 months.Sonoco’s ESG Credit Impact Score is Moderately Negative (CIS -3), indicating that the environmental, social and governance risks are having a limited impact on the current rating. As a manufacturing company, the company is exposed to physical climate, natural capital, pollution risks and health and safety issues, but benefits from conservative financial policies.The stable outlook reflects Moody’s expectation of earnings growth in the legacy Sonoco business in 2022 on higher prices that will support free cash flow generation and deleveraging after the debt-financed Ball Metalpack acquisition.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWe could upgrade the rating if expanding profit margins and declining debt generate sustainable strong credit metrics. Specifically, RCF/Debt would need to approach 30%, EBITDA margin should be in excess of 16% on a sustainable basis and Debt/EBITDA should fall below 2.0 times.We could downgrade Sonoco’s ratings if earnings and free cash flow deteriorate, delaying expected return in leverage to pre-acquisition levels. A downgrade would be considered if Debt/EBITDA were to increase above 3.0 times and RCF/Debt would decline below 20% on a sustained basis either due to a large debt-funded acquisition, debt-funded share repurchases, or structural changes in the industry that lead to permanently lower earnings.Headquartered in Hartsville, South Carolina, Sonoco Products Company (Sonoco) is a global manufacturer of paper, plastic and composite packaging products for the consumer and industrial sectors. Sonoco generated approximately $5.5 billion of sales in the twelve months ended October 3, 2021.Based in Broomfield, Colorado, Ball Metalpack is a manufacturer of tinplate aerosol and food can products. The company generated 55% of sales from food cans and 45% from aerosol cans for the nine months that ended September 2021. The company’s revenue was around $816 million for the 12 months that ended September 2021. In 2018, Ball Metalpack was separated from Ball Corporation as a joint venture between an affiliate of Platinum Equity Advisors, LLC (51%) and Ball Corporation (49%). Ball Metalpack does not publicly disclose financial information.The principal methodology used in these ratings was Paper and Forest Products published in December 2021 and available at hhttps://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1299152. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Anastasija Johnson VP – Senior Credit Officer Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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