Hart's debt mountain has rating agencies edgy

Graeme Hart File photo

The prospect of an US$18.19 billion mountain of debt on Graeme Hart's packaging empire has rating agencies nervous with both Moody's Investors Service and Standard & Poor's paying more attention to the risks in their latest reports.

Moody's today rated various tranches of debt in Hart's Reynolds Group Holdings with junk ratings of between Ba3 and Caa1, while affirming the negative outlook for the group's B2 rating. The company has little room to manoeuvre with such a high level of indebtedness compared to potential earnings, it said.

"The negative rating outlook reflects the company's stretched financial metrics, integration risk and limited room for negative operating or integration variance," Moody's analysts Edward Schmidt and Brian Oak said in their report.

That follows last week's S&P update which kept the group's B+ rating on negative outlook after Hart bumped up the level of debt to buy Graham Packaging Co. by another US$500 million to US$5.5 billion to repurchase outstanding unsecured notes belonging to the new unit.

S&P revised its liquidity assessment on Reynolds Group to 'less than adequate' from 'adequate' in a July 21 report, due to the "proposed increase in term loan amortisation."

In June, Reynolds swooped in to buy Graham Packaging, beating out rival Silgan Holdings with a US$1.68 billion cash offer.

The packaging empire had previously flagged it would take on as much as US$5 billion of new debt to fund the takeover.

Reynolds expects to realise US$75 million in cost savings, and says it anticipates a net leverage ratio of 6 times adjusted earnings before interest tax, depreciation and amortisation.

Still, the rating agencies aren't entirely down on Hart, with Moody's saying Reynolds Group has strong brands and market positioning and is "anticipated to continue to generate some level of free cash flow" which will go into paying down debt.

S&P says Reynolds has a strong business risk profile and is the world's most diversified consumer and foodservice packaging company, even with its "highly leveraged financial risk profile."

The Graham purchase will bring Hart close to being the biggest packaging company in the world, with Tetra Laval Group's annual revenue at 9.99 billion euros (US$14.25 billion) and Hart's sales set to rise to US$13.26 billion, based on pro-forma figures released by Reynolds Group.