Moody's cuts Exopack to B3, rates CPG Finance loan Caa2

Moody's Investors Service said it assigned a Caa2 (LGD5, 88%) rating to CPG Finance Inc.'s proposed $130 million senior unsecured term loan due 2012, affirmed the senior unsecured bond rating of subsidiary Exopack Holding Corp. at B3 and revised the loss-given-default assessment assigned to the notes to LGD3 (43%) from LGD4 (61%).

The agency also downgraded the corporate family and probability-of-default ratings to B3 from B2 and moved those ratings, along with the SGL-3 speculative grade liquidity rating, to CPG Finance from Exopack because CPG is now the highest legal entity with rated debt within the overall legal entity structure of the company.

The outlook is stable.

Proceeds from the new term loan will be used to pay a dividend to CPG's owner, Sun Capital Partners.

The agency said downgrade of the corporate family rating is in response to the planned debt-funded $125 million special dividend to Sun Capital Partners in the second quarter of 2007. Following the special dividend, the company's adjusted debt-to-EBITDA ratio will be slightly above 6.5x and, in Moody's opinion, CPG's progress in improving debt protection measures may be delayed because of tight gross margins and limited free cash flow over the intermediate term due to a highly competitive landscape and the agency's expectation of modest revenue gains.

The ratings are supported by a relevant market position in the flexible packaging industry, margin stability through a contract structure that facilitates the ability to pass through cost increases, a number of long-term customer relationships and adequate liquidity, the agency added.

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