S&P Downgrades Graphic Packaging Rating Due to Weak Demand

Investing.com - S&P Global Ratings today downgraded Graphic Packaging International LLC (NYSE:GPK) from “BB+” to “BB”, citing rising leverage and a weak market. The rating agency expects that by the end of 2025, the adjusted debt to EBITDA ratio will be around 4.6 times, and this ratio will remain above 4 times until 2026. The outlook is stable.

This downgrade reflects a decline in demand for cardboard and an oversupply in the industry following recent capacity increases. Graphic Packaging has completed the construction of its Waco plant, adding 500,000 tons of recycled paperboard capacity, but due to the closure of its plants in Middletown, Ohio, and East Angus, Quebec, the net capacity increase is only 75,000 tons. The oversupply of solid bleached sulfate paperboard has led to price declines, as producers use it as an alternative to coated recycled paperboard, further lowering demand. The company’s revenue is expected to decline by about 2.2% in 2025, with the adjusted EBITDA margin shrinking from 20.1% the previous year to 16.6%.

S&P Global Ratings expects revenue to decline further by 1%-2% in 2026, with margins continuing to contract to the range of over 14%. The margin compression includes a one-time charge of approximately $130 million related to inventory reductions after the completion of the Waco plant. The rating agency expects further industry-wide capacity closures in 2026 to align supply with demand, which should lay the groundwork for stronger performance for the company in 2027.

Cash flow generation is expected to improve significantly in 2026. Capital expenditures are projected to decline from over $900 million in 2025 and $1.2 billion in 2024 to $450 million in 2026. An estimated $280 million influx of working capital driven by inventory reductions is expected to bring the projected free operating cash flow for this year to $675 million to $700 million. Recent covenant amendments will limit annual share buybacks to $65 million until the end of 2027.

S&P Global Ratings expects Graphic Packaging to return to growth in 2027, achieving low single-digit percentage revenue growth, with the EBITDA margin recovering to around 16%. The rating agency expects the debt leverage ratio to potentially decline to 4 times or below by 2027. Debt metrics include approximately $814 million of adjustments reflecting the company’s accounts receivable securitization program.

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