Paper Corp

Key Points

Paper Corp is the third-largest producer of uncoated freesheet in North America. It also
manufactures containerboard, corrugated products, and newsprint.
Modest economic improvement and inventory restocking, demand for uncoated
freesheet has been gradually improving.
Higher volumes and low inventory levels coupled with a rise in input costs has led to
selling price increases, which should benefit the company's earnings meaningfully
beginning later in the second quarter.
In addition, volumes of premium office, label and release and flexible packaging papers
continue to grow.
Paper Corp's supply agreement with its former parent, Rubber Corp (B/Stable/--),
provides some stability in demand. Nevertheless, the loss of volumes as a result of any
deterioration in Rubber Corp's business or financial condition is a risk.
Paper Corps containerboard business is modest in size but provides some earnings
diversity. Price increases are also being implemented in this segment.
Paper Corp's corrugated packaging business should continue to benefit from its
meaningful exposure to more stable agricultural and produce markets.
Paper Corps business portfolio performed well during the recent recession. This, along
with lower raw material and energy costs and cost savings from capacity rationalization,
strengthened adjusted operating margins (before depreciation and amortization)
Margins are expected to remain at similar levels in 2010, and could improve to nearly
14% in 2011 as price increases are fully realized and paper volumes, particularly for
specialty grades, grow.
Paper Corp's financial risk profile is improving following substantial debt reduction in
2009 and prospects for gradually stronger demand and prices as the U.S. economy
recovers.
Paper Corp's earnings should improve in 2010 because of modestly growing volumes
and rising selling prices that more than offset higher costs. In our view, adjusted EBITDA
could increase modestly to at least $260 million for 2010 from $250 million.
For 2011, EBITDA is expected to improve to about $285 million, given our expectations
for the U.S. economy, unemployment, and market conditions.
In addition to reducing debt, Paper Corp issued two $300 million senior unsecured notes
in the last six months, which along with cash on hand, were use to refinance its second-
lien term loan due 2015, term loan B due 2014, and 15.75% note payable due 2015,
thereby extending maturities to 2017 and 2020.
However, the company faces increasing quarterly term loan A amortization over the next
few years, particularly in 2012 when about $130 million is due during the year. These
maturities are expected to decline in a timely manner.
Paper Corp was in compliance with its debt covenants, and we believe that it will
continue to maintain sufficient cushion relative to its amended financial covenants.
During 2009, PC generated about $310 million of adjusted operating cash flow helped by
favorable working capital changes.
After near-maintenance level capital expenditures of about $80 million, the company
generated adjusted free cash flow of about $220 million, which it used to reduce debt
and increase cash on hand.
 Free cash flow in 2010 is expected to be substantially lower (in the $50 million to $75
million range) because working capital should grow modestly along with higher sales,
and the company expects to increase capital expenditures to about $100 million.
It is believed to be sufficient to meet debt maturities over the next 12 months.

Appendix:

Paper Corp Financial Summary

Industry Sector: Paper/Forest Products
Average of past two Fiscal year ended Dec.31
fiscal years 2009 2008
Rating History Issuer BB-/Stable BB-/Negative
(Millions)
Revenues 2,204.4 1,978.2 2,430.6
Net income from cont. oper. 65.6 153.8 (22.7)
Funds from operations (FFO) 160.6 168.7 152.4
Capital expenditures 96.9 89.3 104.5
Debt 1,107.0 957.4 1,256.7
Equity 535.2 620.9 449.4
Ratios
Oper. income (bef. D&A)/revenues (%) 10.4 12.8 8.5
EBIT interest coverage (x) 1.1 1.3 1.0
EBITDA interest coverage (x) 2.4 2.8 2.2
Return on capital (%) 6.2 6.9 5.6
FFO/debt (%) 14.5 17.6 12.1
Debt/EBITDA (x) 4.9 3.8 6.1
Total Debt/debt plus equity (%) 67.4 60.7 73.7

Paper Corp Peer Comparison

Industry Sector: Paper/Forest Products Paper Corp Rock Corp Scissors Corp Rim Corp
Rating as of April 20, 2010 ? BBB/Stable BB/Positive BBB-/Pos
--Average of past two fiscal years--
(Millions)
Revenues 2,204.4 24,097.5 5,929.5 3,730.5
Net income from cont. oper. 65.6 (303.0) (131.5) 99.0
Funds from operations (FFO) 160.6 2,390.6 828.4 372.6
Capital expenditures 96.9 931.0 143.4 161.8
Debt 1,107.0 13,449.3 2,332.5 1,341.6
Equity 535.2 5,328.0 2,402.5 831.5
Ratios
Oper. income (bef. D&A)/revenues (%) 10.4 12.4 12.9 11.2
EBIT interest coverage (x) 1.1 2.2 2.1 1.9
EBITDA interest coverage (x) 2.4 4.4 5.0 4.4
Return on capital (%) 6.2 7.2 5.2 6.3
FFO/debt (%) 14.5 17.8 35.5 27.8
Debt/EBITDA (x) 4.9 4.5 3.1 3.2
Total Debt/debt plus equity (%) 67.4 71.6 49.3 61.7