November 29, 2012 / 10:14 PM / in 5 years

TEXT - S&P revises Cascades Inc outlook to negative

     -- We are revising our outlook on Kingsey Falls, Que.-based Cascades Inc. 
to negative from stable.
     -- At the same time, we are affirming our ratings on Cascades, including 
our 'BB-' long-term corporate credit rating on the company.
     -- The outlook revision reflects on what we consider a 
weaker-than-expected financial performance in the company's containerboard and 
boxboard segments, leading to a slower pace of deleveraging than previously 

Rating Action
On Nov. 29, 2012, Standard & Poor's Ratings Services revised its outlook on 
Kingsey Falls, Que.-based packing and tissue manufacturer Cascades Inc. to 
negative from stable. At the same time, Standard & Poor's affirmed its ratings 
on the company, including its 'BB-' long-term corporate credit rating.

We base the outlook revision on what we consider a weaker-than-expected 
financial performance in the company's containerboard and boxboard segments, 
leading to a slower pace of deleveraging than previously expected.  

The ratings on Cascades reflect what Standard & Poor's views as the company's 
fair business risk profile and aggressive financial risk profile. The 
strengths are visible in Cascades' good market position in a consolidated 
industry, diverse revenue stream, and vertical integration. These strengths 
are partially offset, in our opinion, by what we see as the company's exposure 
to the cyclical boxboard and containerboard markets, volatile recycled fiber 
prices, and high debt levels.

Cascades is an integrated packaging and tissue company that manufactures, 
converts, collects, and processes recycled paper. It is the No. 1 
containerboard producer in Canada, the second-largest producer of coated 
recycled boxboard in Europe, and fourth-largest tissue producer in North 
America. The company operates facilities in Canada, the U.S., and Europe.

Standard & Poor's bases its fair business risk profile on Cascades' sizable 
market share in consolidated markets. The top five producers control a large 
majority of the market share, with a good market position in the Canadian 
containerboard, European boxboard, and North American tissue segments. The 
company's operations are fairly diverse, in our opinion, with no one segment 
representing more than one-third of Cascades' overall revenues and EBITDA. 
While we view the company's tissue business as fairly stable with steady 
growth in demand, price increases appear unlikely as a moderate amount of new 
tissue capacity is set to come online in the near term. Its other two key 
businesses--containerboard and, to a lesser extent, boxboard--are cyclical. 
Cascades' acquisition of a controlling share in Reno De Medici SpA (RdM; not 
rated), resulting in full consolidation, combined with two existing operating 
mills in France and Sweden, has increased its boxboard segment's exposure to 
Europe, which at present appears vulnerable. 

Overall, the company's profitability depends on its ability to pass through 
recycled fiber costs, which represent about one-third of its production costs. 
While sale prices do move up with increases in recycled fiber prices, there is 
often a lag of a few months. Recycled fiber prices tend to be volatile and 
influenced by demand from China. While Cascades' upstream integration into 
Metro Waste Paper Recovery Inc. (not rated) provides it with one-third of its 
recycled fiber needs, this does not insulate the company from volatility in 
recycled paper prices, because the prices it paid for most of the collected 
paper are based on spot recycled paper prices. Through 2012, recycled fiber 
prices have dropped substantially from relative highs in 2011; however, 
Cascades' earnings to date have not reflected the full benefit and operating 
costs appear to be rising.

Cascades' aggressive financial risk profile reflects, in our opinion, a large 
amount of leverage held in its capital structure. As of Sept. 30, 2012, 
Standard & Poor's adjusted debt for Cascades is C$1.8 billion; adjustments 
total C$250 million and adjust for underfunded pension obligations, operating 
lease adjustments, and asset retirement obligations. The higher debt levels 
reflect draws on its revolver used to fund: an investment in Cascades' 
Greenpac joint venture, the acquisition of Bird Packaging Ltd. (not rated), 
and investments in upgrades to its enterprise resource planning systems, among 
other things. Trailing 12-month adjusted EBITDA is C$283 million, resulting in 
an adjusted debt-to-EBITDA ratio of 6.4x. Our financial model assumes the 
     -- Revenue declines 2% to C$3.55 billion;
     -- EBITDA margins remain in the single digits for 2012 and 2013;
     -- Break-even working capital changes in 2012;
     -- Capital expenditures average about C$150 million in 2012, and 
declining in 2013; and
     -- Dividends of C$16 million per year.

Based on our forecasts, we expect adjusted debt-to-EBITDA to improve to about 
5.6x by year-end, and improve to about 5.2x in 2013. If we treat Cascades' 
interests in RdM as an equity investment and deconsolidate its financials, 
credit metrics weaken slightly to 5.7x and 5.4x. These metrics are slightly 
worse than we expected at the beginning of the year, as weaker-than-expected 
earnings resulted in leverage stabilizing at a rate higher than expected. The 
credit metrics are on the outskirts of the acceptable range for an aggressive 
risk profile; however, we do expect metrics to improve throughout 2013. Cash 
flow protection levels (as measured by funds from operations to adjusted debt) 
are in the low teens at the moment and we expect them to remain at about the 
same level in the next 12 months.

Cascades has adequate liquidity in our view, with C$13 million cash on hand 
(excluding cash in RdM) and about C$360 million (excluding RdM and Metro Waste 
Paper) available under its C$750 million credit facility. This credit facility 
was renewed recently and matures in 2016. For 2012, we expect:
     -- A sources-to-uses ratio of above 1.2x; 
     -- A positive sources-minus-uses calculation in the event expected EBITDA 
declines 15%; and
     -- Cascades' likely ability to absorb--with limited need for 
refinancing--high-impact, low-probability events.

With a favorable debt maturity profile, we believe revolver availability and 
cash from operations to be sufficient to fund capex, acquisitions, investments 
in associates, dividends, and share repurchases in the near term. For the most 
recent quarter, Cascades remains compliant with its financial covenants with 
adequate headroom.

Recovery analysis
We rate Cascades' secured debt 'BB+' (two notches above the corporate credit 
rating on the company), with a recovery rating of '1', which indicates our 
expectations of very high (90%-100%) recovery in the event of default. We rate 
the company's senior unsecured debt 'B+' (one notch below the corporate credit 
rating on Cascades), with a '5' recovery rating, which indicates our 
expectation of modest (10%-30%) recovery in default. 

The negative outlook reflects our view that Cascades' weaker-than-expected 
earnings through 2012 have resulted in slower deleveraging than previously 
expected. While we believe the company will improve earnings and adjusted 
leverage metrics commensurate with an aggressive financial risk profile in the 
next year, it will require a favorable operating environment to continue 
through 2013. Based on our expectation of recycled input prices, we believe 
Cascades' EBITDA generation will improve in 2013 and adjusted debt-to-EBITDA 
will decline to about 5.2x. Standard & Poor's would likely lower the ratings 
on the company if margins do not recover as expected in the first half of 
2013, leading to lower-than-expected EBITDA and a stabilized leverage greater 
than 5x. Given our expectations, an upgrade is unlikely in the near term but 
would require substantial repayment of debt demonstrating its ability to 
sustain a leverage of 3.5x.

Related Criteria And Research
     -- Methodology and Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Our Rating Process, April 15, 2008 

Ratings List
Outlook Revised To Negative
                           To                From
Cascades Inc.
Corporate credit rating    BB-/Negative/--   BB-/Stable/--

Ratings Affirmed

Cascades Inc.
Secured debt               BB+
 Recovery rating           1
Senior unsecured debt      B+
 Recovery rating           5

Norampac Inc.
Senior unsecured debt      B+
 Recovery rating           5

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