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Investing.com -- Rayonier Advanced Materials (NYSE:RYAM) Inc. has seen an upgrade in its issuer credit rating from ’B-’ to ’B’ at S&P Global due to improving credit metrics. The firm’s core high-purity cellulose (HPC) segment is expected to counterbalance pricing pressure in its paperboard and high-yield pulp segments, thanks to favorable industry dynamics. The outlook for the company remains stable.
The higher rating comes in light of the company’s strengthened credit metrics, which have improved due to increased earnings. The debt to EBITDA ratio, as adjusted by S&P Global Ratings, was at 5x on a Last Twelve Months (LTM) basis as of the end of the third quarter (Sept. 30, 2024), showing an improvement from 6.2x at the end of 2023. This improvement was driven by year-over-year improvements in earnings.
However, the company’s diversification strategy, which includes a focus on developing its biomaterials strategy, is expected to put a strain on free cash due to elevated capital expenditure (capex). The first shipment of the company’s bioethanol product was commercialized in the second quarter of 2024, which is expected to benefit EBITDA by approximately $4 million for the fiscal year, with an additional $4 million of run-rate EBITDA in 2025. Despite this, the company is expected to generate cashflow deficits in 2025, due to anticipated high capex spend.
The company’s capital structure saw improvements following its refinancing in the second half of 2024. This has pushed the company’s next significant maturity to 2029, when its $175 million asset-based lending (ABL) revolver and $700 million term-debt mature. This provides some relief before cash flow deficits could potentially impact credit quality.
The company’s business risk profile remains unchanged, as does its scale of operations, including its revenue and earnings base, and the number of operating assets. This is considered small in comparison to similar and higher-rated peers. The company’s 5-year average EBITDA margin is on the lower end for the forest and paper products industry, despite its market leadership position in the niche cellulose business.
The stable outlook reflects expectations for leverage to remain in the high 4x-5x area over the next 12 months, and also reflects anticipation for negative free operating cash flow (FOCF) generation in 2025.
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