Investing.com -- S&P Global Ratings has revised its outlook on Cascades Inc (TSX: CAS ). to negative from stable due to higher-than-expected debt levels and operating costs in 2024, which led to weaker annual earnings and credit measures. The ratings agency affirmed all its ratings on the company, including the ’BB-’ long-term issuer credit rating.
The negative outlook reflects Cascades’ elevated S&P Global Ratings-adjusted debt to EBITDA of well above 4x, which is considered high for the rating, especially given the weaker macroeconomic backdrop and the company’s significant debt maturities over the next three years. The company’s debt levels have increased amidst ongoing macroeconomic uncertainty, which raises the possibility of weaker product demand or profit margins, potentially leading to a slower-than-expected pace of deleveraging.
In 2024, the company’s S&P Global Ratings-adjusted debt to EBITDA increased to 4.8x, largely due to higher raw material costs, particularly for old corrugated containerboard (OCC) and pulp, which weakened the earnings and profitability of its containerboard segment. Unfavorable currency translation headwinds and lower free operating cash flow (FOCF) generation also contributed to its higher-than-forecast debt.
S&P Global Ratings expects Cascades to improve its credit measures over the next few years, including reducing its S&P Global Ratings-adjusted debt to EBITDA to about 4x this year and to the mid-3x area in 2026. This is anticipated to be achieved through increased profitability and volumes in its containerboard segment, higher FOCF generation, and proceeds from asset disposals, which should facilitate its debt repayment.
However, a weaker macroeconomic backdrop has increased the probability of a downgrade over the next 12 months. Cascades’ profitability has trended weaker in recent years, and it has experienced a higher degree of earnings volatility than its similarly rated peers, due to the sensitivity of its credit metrics to volatile input costs and recent shifts in containerboard prices.
Cascades is expected to increase its earnings and FOCF by improving the profitability of its containerboard segment and reducing its capital expenditure (capex). Higher containerboard prices and increasing volumes are expected to improve the revenue and margins of the company’s containerboard segment over the next few years. This, combined with the steady profitability of its tissue segment, is likely to contribute to the expected improvement in Cascades’ earnings and operating cash flows.
The company is expected to expand its consolidated S&P Global Ratings-adjusted EBITDA to about $535 million in 2025, up about 15% from 2024, and by the low- to mid-single digit percent range annually over the following years. The improvement in Cascades’ EBITDA, along with its lower capex, will enable it to generate increased FOCF, which it is assumed will be used primarily to repay debt.
Cascades faces significant debt maturities over the next three years, which increases its credit risk. As of March 31, 2025, the majority of the company’s debt was set to mature in the next three years. S&P Global Ratings assumes Cascades will manage its debt maturity profile through refinancings and extensions, with failure to do so in a timely manner potentially leading to increased refinancing risk and greater downward pressure on its ratings.
S&P Global Ratings could lower its rating on Cascades over the next 12 months if it expects the company will sustain S&P Global Ratings-adjusted debt to EBITDA of well above 4x. This could occur if the company’s profitability is weaker than anticipated, potentially due to higher input costs or weaker demand for its products. The rating could also be lowered if management fails to make significant progress toward extending its debt maturity profile.
The outlook on Cascades could be revised to stable in the next 12 months if its credit measures trend in line with or exceed expectations, including S&P Global Ratings-adjusted debt to EBITDA of 4x below 4x. Under this scenario, the company would have likely reduced its debt outstanding while improving its S&P Global Ratings-adjusted EBITDA margins and FOCF generation.
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