Millar Western Forest Products Ltd. Downgraded To 'CCC+' From 'B' On Uncertainty Of COVID-19 Impact; Outlook Negative
- We believe Millar Western Forest Products Ltd. faces heightened liquidity risk mainly due to the uncertain impact of the COVID-19 outbreak on its facilities and weak lumber and pulp markets.
- We believe the company faces high refinancing risk due to elevated prospective leverage and significant debt maturing in 2023.
- As a result, S&P Global Ratings lowered its issuer credit rating on Millar Western two notches to 'CCC+' from 'B'.
- At the same time, we lowered our issue-level rating on the company's senior secured notes to 'B-' from 'B+'. The '2' recovery rating on the notes is unchanged.
- The negative outlook reflects our view of the risk that Millar Western's liquidity position and refinancing prospects could weaken in 2020 and increase the likelihood for a debt restructuring transaction.
TORONTO (S&P Global Ratings) April 7, 2020--S&P Global Ratings today took the rating actions listed above. The downgrade reflects our view of the increased risk to Millar Western's liquidity position due to market headwinds. We believe Millar Western could face a significant deterioration in its liquidity position this year in the event that weakness in the pulp and lumber market persists. Lower pulp and lumber prices led to the company's sharply higher leverage and free cash flow deficit in 2019, which reduced Millar Western's cash position and financial flexibility. The emergence of COVID-19, and S&P Global Economics' expectation for a global recession, has also added downside risk to market fundamentals and the company's shipments. In our view, Millar Western faces heightened exposure to free cash flow deficits to an extent that could significantly reduce its cash position.
For example, we estimate the company would generate a free cash flow deficit of about C$30 million if lumber prices remain near current levels (low-US$300 per thousand board feet) in 2020, all else being equal. Millar Western had about C$67 million in cash at Dec. 31, 2019, but we expect this to materially decline (by about 50%) in first-quarter 2020 due to seasonally high working capital requirements. In this scenario, we believe the company would be reliant on its asset-based credit facility (ABL; which is subject to a borrowing base) to fund its operations entering next year, and potentially sooner if working capital remains elevated due to weaker demand.
The negative outlook reflects our view that a global recession this year could depress lumber and pulp markets, increasing the likelihood that Millar Western will generate a large free operating cash flow deficit. In this scenario, we believe that the company's liquidity position would be significantly constrained, and increase the likelihood for a distressed exchange of Millar Western's secured notes.
We could lower the ratings if, within the next 12 months, we envision a specific default scenario for Millar Western. Such a scenario would likely include a depletion of the company's cash position or expectation for the company to proceed with a distressed exchange of its secured notes. In our view, this could follow sustained lumber and pulp market weakness, a protracted operating disruption, or the company's notes trading significantly below par as maturity approaches.
Within the next 12 months, we could revise the outlook to stable or raise the ratings if Millar Western generates substantial free operating cash flow, thereby increasing its cash position, while maintaining a debt-to-EBITDA ratio of about 5x or less. In such a scenario, we would expect a sustained recovery in pulp and lumber prices above our assumptions amid steady shipment levels.
Related Criteria
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Related Research
- Global Macroeconomic Update, March 24: A Massive Hit To World Economic Growth, March 24, 2020
- COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
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Global-scale credit rating(s) issued by S&P Global Ratings' affiliates based in the following jurisdictions [To read more, visit Endorsement of Credit Ratings] have been endorsed into the EU and/or the UK in accordance with the relevant CRA regulations. Note: Endorsements for U.S. Public Finance global-scale credit ratings are done per request. To review the endorsement status by credit rating, visit the spglobal.com/ratings website and search for the rated entity.
| Primary Credit Analyst: | Andrea Sigurdson, Toronto + 1 (416) 507 3234; andrea.sigurdson@spglobal.com |
| Secondary Contact: | Jarrett Bilous, Toronto (1) 416-507-2593; jarrett.bilous@spglobal.com |
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