At the same time, we lowered our issue-level rating on the company's senior secured notes to 'CC' from 'CCC+'. The '5' recovery rating is unchanged and indicates our expectation of modest recovery (10%-30%; rounded estimate: 20%) in the event of a default.
In conjunction with its third quarter earnings results, PaperWorks Industries announced that it is obligated to redeem approximately $32 million of its senior secured notes as a result of its sale of Manchester Industries (in December 2016). The company will be obligated to make this redemption offer, or "Asset Sale Offer" per the secured note indenture, by January 2, 2018, with funding expected between 23 to 33 business days thereafter.
The negative outlook on PaperWorks reflects the increasing likelihood that a default or distressed exchange will be inevitable given the company's $32 million near-term redemption obligation. If the company chooses to undertake such a restructuring, we would view it as a selective default.
We could lower our ratings on PaperWorks if the company engages in a distressed exchange, restructuring, or similar offering, or if the company does not meet its debt obligations.
We could raise the rating on PaperWorks if the company is able to meet all debt obligations, including the required near-term redemption, while not engaging in a transaction we would view as a distressed.