Georgia Pacific to sell about $2 billion in unsecured notes, as planned in late 2019
By David Pendered
Atlanta-based Georgia Pacific plans to offer about $2 billion in senior unsecured notes and has obtained an investment grade credit rating from Moody’s Investors Service, according to a credit rating action.
The company began taking steps to secure access to cash in late 2019, according to the rating action. The timing of the move coincides with that taken by other corporations that bolstered their cash holdings in preparation for a potential economic downturn in 2020, even before the pandemic emerged.
Georgia Pacific intends to use the money for, “general corporate purposes including the payment of existing debt,” according to the April 27 rating action. GP is a major provider of tissue, wood products, pulp, paper packaging and disposable tableware, according to the rating action.
Moody’s analysts reported GP has about $5.4 billion of liquid resources that can be used to cover $1.25 billion of debt that’s to mature over the next 12 months. This is the scenario for the resources:
- $2.5 billion in cash, as reported in a December 2019 report related to this proposed note offering;
- $1.6 billion in a cash pooling notice with Koch, all of which is available within a three-day notice;
- $1 billion unused credit agreement with Koch;
- Moody’s anticipation of $300 million a year in free cash flow, as estimated by Moody’s.
GP parent company Koch Industries recently sold $53.9 million in equity, according to a form filed March 11 with the federal Securities and Exchange Commission.
The company does not intend to use the proceeds to fund a merger, acquisition or exchange offer. Nor does Koch intend to the use the money to pay any corporate executives, according to the SEC form.
Koch is not required to release details of the equity sale other than to state the number of investors, which was 20, and to state the minimum investment, which was $1.3 million. This particular SEC form is used to report that a company has raised an unlimited amount of cash from investors who deem themselves as knowledgeable of the risks, or with a net worth in excess of $1 million.
GP’s credit situation is expected to weaken from the issuance of this debt, and from lower returns on building and pulp prices. A return to historic norms is expected in 2021, according to the rating action.
The credit rating action by Moody’s was generally favorable. Analysts rated the notes A3, which is the seventh of 10 investment grade rankings. An A3 rating denotes upper-medium grade and subject to low credit risk, according to Moody’s scale.
The outlook on the notes is stable, as analysts observed:
- “The stable outlook is based on Moody’s expectation that GP’s diverse product offering and strong liquidity will allow the company to generate good financial performance through volatile industry conditions. We expect operating earnings will decline slightly over the next 12 to 18 months, primarily due to lower average pulp and paper packaging prices. Away-from-home tissue and wood products demand will also be negatively impacted in 2020 due to a decrease in economic activity, including industrial shut downs, as the coronavirus spreads. The strong demand for retail tissue products in the first quarter (primarily due to hoarding) is expected to reverse during the second half of the year. We expect GP’s operating earnings will improve toward historic levels in 2021.”