Morningstar is initiating credit coverage of metal beverage can producer Rexam(REX) with an issuer rating of BB. While Rexam carries a large debt burden compared with its underlying cash-generating capacity, its low-volatility profitability moderates overall default risk. As a consequence, our issuer rating is somewhat higher than the company's coverage and leverage ratios might imply.
As of June 30, Rexam's total debt stood at £1.9 billion, down from £2.3 billion at June 30, 2009. Leverage and coverage ratios aren't particularly strong. Including net retirement benefit obligations of £399 million, adjusted debt/EBITDA for the trailing 12 months was 3.2 times, down from 3.7 for the 12 months ended June 30, 2009. Cyclically stronger EBITDA and a reduction in debt load (facilitated by £334 million in fresh equity) drove the improvement. EBITDA/interest coverage was a modest 5.4 times for the 12 months ended June 30, 2010, up from 4.6 for the prior-year period. These metrics are slightly weaker than higher-rated peer Ball (BLL: BB+) and slightly stronger than lower-rated peer Crown Holdings (CCK: BB-).
Rexam, Ball, and Crown collectively own a roughly 80% share of the North American metal beverage container market and 90% of the European market. This relatively oligopolistic arrangement has its benefits from a credit perspective, partially offsetting our concerns about Rexam's hefty debt load and meagre growth prospects in its key markets. In contrast to many commodity industries defined by intense price competition and highly variable profitability, the beverage container market's concentrated structure (along with the cost-prohibitive quality of shipping empty containers significant distances) has for the most part prevented the kind of price wars that can wreak balance sheet havoc.
Read Introducing Morningstar's Corporate Credit Ratings for more information on our methodology.
