S&P Considers Constar's Aggressive Financial Profile

Standard & Poor's has assigned a preliminary BB- rating to Constar International's $250 million credit facility, which backs the beverage container company's spin-off from Crown Cork & Seal. Constar's total pro-forma debt is about four times EBITDA, although that ratio is expected to improve to 3.5 times. "Compared to the most aggressive companies, it's not a bad starting point given leverage," said Kyle Loughlin, director and analyst at S&P. Still, the distressed enterprise value may not offer lenders a full recovery in a default scenario.

In addition, Constar faces a highly fragmented and competitive industry. There are six or seven larger players and numerous smaller players, and the industry leader only holds a market share of about 10%, noted Liley Mehta, associate analyst at S&P. Due to the plethora of players offering polyethylene terephthalate containers for carbonated beverages and Constar's narrow customer base ­ PepsiCo accounts for 37% of its revenue ­ the company is subject to pricing pressures and slimmer margins.

On the positive side, however, the Philadelphia company intends to invest more resources in developing its value-added, custom container segment. This move will allow Constar to tap into a market segment that offers higher margins and a loyal customer base, Loughlin said. S&P expects that capital expenditure will increase as the company looks to develop its specialized products.

The company's sufficient liquidity, a light amortization schedule and a history of consistent free-cash generation also support Constar's ratings. Furthermore, price volatility associated with the raw materials used to produce the packaging will not impact the company as the costs typically are passed on to customers. James Cook, cfo of Constar, could not be reached by press time.