Dunn Paper Holdings Inc. was downgraded by S&P Global Ratings on Jan. 19 to CCC, from CCC+, retaining a negative outlook, with the agency citing the refinancing risk of the company's first-lien credit facilities due Aug. 26, 2022. Dunn's secured debt was downgraded as well, with its $260 million first lien term loan (L+475, 1% floor) and $18 million revolver both lowered to CCC, from CCC+, and its second-lien term loan (L+875, 1% floor) downgraded to CC, from CCC-.

Ratings said that as of Sept. 31, 2021, Dunn's year-to-date free cash flow deficit was $23.4 million, while bank-reported leverage hit 7.4x, more than the 6.75x first-lien debt covenant. Ratings noted that Dunn has hired a refinancing adviser, but it added that "there is a heightened risk of default or restructuring due to difficult operating conditions resulting in protracted high leverage and weak liquidity."

The rating agency said Dunn has no balance sheet cash, instead using overdraft facilities and its $30 million revolver to fund shortfalls. Although Ratings projects free cash flow to "significantly improve" this year, it believes that the company's weak liquidity "could lead to a restructuring or debt exchange that we view as tantamount to a default."

In November 2021, Moody's downgraded Dunn to Caa1, from B3, and revised its outlook to negative, from stable, noting that higher pulp prices had weakened the company's performance over the prior year. Moody's cut Dunn's secured debt as well, with its first-lien secured credit facilities lowered to Caa1, from B3, and its second-lien term loan reduced to Caa3, from Caa2.

Dunn Paper manufactures specialty paper primarily used in the food service, flexible packaging, medical and specialty tissue markets. It is owned by private equity firm Arbor Investments.