Fitch Revises Solo Cup Co.'s Outlook to Positive; Affirms IDR at 'B-'

Business Wire,  May 2, 2008  

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NEW YORK -- Fitch Ratings has affirmed Solo Cup Company's (Solo) Issuer Default Rating (IDR) and existing credit ratings as follows:

--IDR affirmed at 'B-';

--Senior secured term loan affirmed at 'BB-/RR1';

--Senior secured revolving credit facility affirmed at 'BB-/RR1';

--Senior subordinated notes affirmed at 'CCC+/RR5'.

The Rating Outlook is revised to Positive from Stable. Approximately $756 million of debt is covered by the ratings. The company's Canadian bank debt is excluded from the ratings.

The Rating Outlook revision is based on positive operating trends and continued execution of the company's turnaround strategy, which offset concerns about potentially weaker volumes and cost inflation. Fitch expects that the company's earnings and cash flow will continue to improve in 2008, and credit metrics should continue to strengthen during the year. In addition, Solo has resolved all outstanding material weaknesses in internal controls. If Solo's performance continues to meet these expectations over the course of the coming quarters, the ratings could be reviewed for a possible upgrade.

The ratings recognize Solo's leading market share across its product categories; strong brand recognition; diversified raw materials mix; diverse, stable customer base; and modest near-term debt maturities. Concerns center on high leverage; margin and volume pressure due to intense competition; and cost inflation in resin and energy prices. Fitch also expects softer industry volumes in the coming year, which could generally constrain demand and erode price support.

Fitch's recovery analysis continues to indicate full expected recovery of the company's bank debt in a hypothetical distressed scenario. Expected recovery for the senior subordinated notes remains within the 'RR5' band (11%-30%). Improved earnings or an upward revision of the IDR could lead to an upgrade of the notes in the intermediate term.

Solo has made clear progress through its performance improvement program, achieving about $75 million of cost savings, greater than initial expectations of $60 to $70 million. Performance consultants have been disengaged which should result in additional cost savings of $20 million or more going forward. While some earnings potential has been lost due to business divestitures, improved efficiencies, better product mix management, and greater pricing discipline are likely to more than offset these losses.

Higher raw materials prices and other cost inflation will likely continue to challenge profitability for Solo. In addition, competition within Solo's key markets remains intense. General foodservice industry volumes are likely to be softer in the coming year with growth rates in the low single digit range. Solo's ability to manage its core product portfolio profitably in the face of these challenges will be monitored.

Solo achieved meaningful debt reduction in 2007 and as a result total leverage has declined appreciably from 9.8 times (x) at first quarter ended Apr. 1 2007 to 5.7x at fiscal year end 2007, by Fitch calculations. Fitch expects further deleveraging as trailing twelve month EBITDA figures begin to benefit from the above-mentioned cost savings and an unusually weak 1Q07 falls out of the calculation. Solo has announced a few remaining asset sales in 2008 which could serve to reduce debt modestly by the end of the year. Fitch expects the company will be able to meet tightening consolidated leverage ratio requirements over the course of 2008. By fiscal year end, Solo must achieve leverage of 4.5x according to the terms of its bank credit agreement.

Fitch expects certain cash expenses to increase in the near term stemming from announced facility realignments and higher management compensation. Capital expenditures are also likely to move higher in 2008 as the company modernizes some equipment. Free cash flow (defined as cash from operations less capital expenditures) is projected to remain positive and should improve from the 2007 figure of $48.4 million, as Fitch expects higher earnings and better working capital management.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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