EMEA Packaging Quarterly: Subdued Demand, High Costs to Constrain Sector Recovery; Crunch Time for KP, Ardagh, Maturity Walls; Constructive on Progroup, Reno De Medici Due to Liquidity Room

Relevant Item:
Global Packaging Sector Quarterly July 2023

European high-yield packaging sector companies are navigating a sea of complexities. The market environment is characterized by subdued demand, with industry overcapacity preventing manufacturers from raising prices to reflect cost inflation amid a deteriorating global trade environment. As a result, visibility on earnings is limited.

As highlighted in our last sector report, with destocking crippling the packaging industry since 2022, the urge to improve growth prospects, cost structures and margins led to a wave of large cross-border M&A transactions in 2024. We expect this trend to continue in 2025.

Two major debt restructuring announcements are expected in the coming weeks for our packaging names. Ardagh is set to release a proposal imminently to deal with $6.7 billion of notes due 2026 and 2027, and Kloeckner Pentaplast is negotiating an amend and extend with its creditors after refinancing plans for its €1.6 billion 2026 maturity wall faltered.

This latest quarterly packaging report updates readers on the key dynamics driving the sector, most notably, raw material costs, chiefly pulp, paper, plastic and aluminum; rising energy costs; and tariffs.

We also review the overall financial performance of European packaging issuers. Lastly, we discuss price movers, relative value and secondary opportunities in the sub-investment grade packaging sector.
 

 

Input cost inflation remains a concern for the packaging companies under our coverage, as margins and profitability remains below pre-pandemic levels.

In this section, we discuss the latest pricing dynamics for energy and key raw materials, two major cost inputs in the production process, and highlight each issuers’ exposures.

For paper-based packaging companies, which constitute the majority of our coverage, pulp, waster paper and containerboard, the intermediate material employed in the manufacturing of corrugated board, are their key raw materials.

For the remaining packaging groups, key raw materials include plastic resins and aluminum.

Energy

While still below the peaks reached in 2022, European gas prices hit last week a two-year high as colder weather boosted demand, accelerating withdrawals from fast-depleting reserves. Futures on the European benchmark TTF rose to as much as €58.50 per megawatt hour, the highest level since February 2023. Prices have since slightly retreated on the prospect of a Ukraine peace deal.

Energy costs differential with North America continue to be detrimental to European manufacturers, as we highlight in our last Chemical Sector report. Click HERE to access it.
 

Pulp (Companies Concerned: Sappi, Fedrigoni, SIG Combibloc, Ahlstrom)

In 2024, The global pulp market saw a surge in prices due to supply constraints and unforeseen events such as port strikes in the U.S. and a boiler explosion in Finland.

In Europe, pulp prices rose to a record high in July 2024 for both hardwood and softwood pulp grades, reaching €1,500 and €1,300 per ton, respectively. They have since retreated to respectively €1,400 and €1,000 per ton as supply outstrips demand. They are currently approximately 15% higher than a year earlier.

With uncertainties regarding geopolitics and global trade relations, it is not entirely clear what the future will bring for pulp prices. So far in 2025, while inventories have come down and demand from China has improved of late, prices have been relatively stable compared with the fourth quarter of last year.

Pulp suppliers are nonetheless pushing for price increases in light of persistently high wood and energy costs. Two major pulp manufacturers have in fact announced in recent weeks price increases of between €50 to €100 per ton (SCA, Suzano).

The chart below is a summary of pulp prices, as shown by Sappi in its latest results presentation:
 

Waste Paper (Companies Concerned: Progroup, Reno De Medici, Pro-Gest)

Old corrugated containers, or OCC, the key waste paper grade used in packaging production, have been steadily increasing in price since the end of 2022, rising to a peak of €166 per metric ton in July 2024, about 75% higher year over year. They have since fallen by 33% to an average price of €111 per ton in December.

Some European countries, such as Germany and the U.K. were however already seeing prices taking upward trajectories, driven by rising export prices. The strengthening of the U.S. dollar and continued very low freight rates are also making exports from Europe attractive.

Internal demand remains however generally subdued with a balanced supply and demand. So far in 2025, prices were reportedly relatively stable in France and Italy.

The chart below shows historical OCC prices, including the substantial jump in 2024. Futures contracts suggest relatively stable OCC prices during 2025 and for the beginning of 2026.

 

Source: Norexeco

Containerboard (Companies Concerned: Progroup)

For containerboard, prices are primarily determined by local supply-demand dynamics, raw material prices and other operating costs. Historically, containerboard and corrugated board prices have tended to be cyclical.

In 2024, most producers have been trying to raise prices however these increases did not hold, with prices coming under pressure toward the end of last year due to falling recovered paper prices.

For 2025, a clear picture has yet to be established with reportedly some pushback on the implementation date of price increases announced at the beginning of the year.

Aluminum (Companies Concerned: Ardagh Metal Packaging, Crown Holdings, Guala Closures, Trivium Packaging)

Aluminum markets certainly face a year of turbulence due to geopolitical tensions and the Trump administration’s tariffs announcements. On Feb. 10, President Donald Trump indeed signed proclamations imposing 25% tariffs on all imported steel and aluminum.

As we discussed HERE, domestic beverage can producers account for over 25% of U.S. aluminum consumption, making aluminum packaging one of the largest domestic aluminum end-markets. Domestic aluminum production is however below consumption, making imports necessary. As a result, tariffs will likely put pressure on prices in the U.S. The main three aluminum can producers are Ball Corp., Crown Holdings and Ardagh Metal Packaging.

In Europe, aluminum prices in Europe are also likely to increase due to supply chain disruptions and high energy costs. Also, in their latest sanctions package, announced this week, the EU has agreed to ban aluminum imports from Russia.
 

Other Raw Materials

The cost environment for plastic-based packaging companies is relatively unchanged due to stable PET prices. Producers are reportedly waiting for an opportunity to increase prices, but subdued demand has squashed previous attempts. Spot prices are hovering at more than a-year low after a stable-to-softer trend since August.

Overall, going into 2025, the raw materials cost picture is more favorable than last year for paper-based packaging producers and somewhat less favorable for those companies exposed to aluminum prices. However, the recent spike in energy costs is a concern given the high energy requirements of packaging manufacturers, especially on the paper packaging side.
 

In January, as highlighted by the eurozone manufacturing PMI, which rose from 45.1 in December 2024 to an eight-month high of 46.6 in January, there is a slight easing in the contraction of the European manufacturing sector. Although output and new orders continue to decline, the pace of decline has slowed, with renewed signs of cost inflation.

In Germany and France, the situation for capital goods, intermediate goods and consumer goods is no longer as dire as it was the previous month. It is possible that things will improve this year.

That said, the political climate in France is particularly concerning for the industry. Operating conditions in Italy also remain bleak. Signs of improvement are scarce, as both domestic and foreign order books are plummeting. The U.S. was Italy’s second most important export destination in 2023, with a share of 10.7% of total exports, making Italy one of the most exposed countries to potential U.S. tariffs in the eurozone.
 

In accordance with retail sales, Eurostat disclosed earlier this month that retail trade volume in December 2024 compared with November 2024 declined by 0.3% in the EU. In November 2024, the retail trade volume had grown by 0.1% month over month.

Despite the monthly decline, annual figures in 2024 reflected a more positive trend. Compared with December 2023, retail trade volume increased by 1.9% in the euro area and by 2.0% in the EU.

December’s fall in eurozone retail sales means that growth over Q4 as a whole slowed substantially. Spending growth is expected to remain subdued in the coming quarters.
 

 

European high-yield packaging issuers are on average trading tighter than the main index, with the average yields of double B at 3%, compared with the ICE BofA Index effective yield of 4%. Single B rated packaging issuances are trading slightly wider than the index, at 5% compared with 4.8%.
 

Progroup’s 2029 and 2031 bonds, which were both trading around par until August 2024, have fallen to 95 on the back of underwhelming second- and third-quarter earnings reports, with €149 million of negative free cash flow in the nine-month period to Sept. 30, 2024. The bonds were further penalized after Moody’s moved the outlook on its Ba rating to negative. They are now yielding 5.4% and 5.7%, respectively.

The business outlook of the German containerboard and corrugated board manufacturer is cloudy but liquidity is adequate, with €133 million of cash on balance sheet as of Sept. 30, 2024, and a €200 million fully undrawn RCF. There are also no near-term maturities. The credit profile is also supported by the company’s track record of high profitability, with margins between 19% and 28% in the 2018 to 2022 period. On balance, the credit profile of the company is attractive from a risk return prospective. See our coverage HERE.

Reno De Medici’s 2029 bonds are down by about 6 points since late November 2024, and are now quoted in the 84 area and are yielding 12.1%. Since our forecasts point to rising leverage and more cash burn in 2025, we see a better risk-reward opportunity if the price of the bonds falls to the 75-80 area. There is also a possibility of a downgrade to Caa1 by Moody’s as the ratings agency said a further downgrade could occur upon further utilization of the RCF, a scenario we believe is likely in 2025.

That said, Octus’ analysis does not suggest a liquidity shortfall in our base-case scenario up to the maturity of the 2029 SSNs with RCF headroom adequate to absorb near-term needs. In this scenario, we expect leverage to peak at nearly 8x in the second half of 2025, though a breach of the RCF’s financial covenant is unlikely.

The Italian recycled cartonboard manufacturer has hemorrhaged roughly €100 million in levered free cash flow in the nine-months period to Sept. 30, 2024, hit by volatile raw material prices and its inability to pass these on to customers. EBITDA margins halved to a mere 5% in the third quarter of 2024 compared with a year earlier.

See Octus’ recovery analysis on Reno De Medici HERE.

Despite trading 3 points below par, we do not see excess value in Guala Closures’ 2028 fixed-rate bonds, which are yielding 4.4%. Volumes in the global alcoholic beverage market declined by mid-single-digit rate in 2024 and new headwinds such as tariffs could delay the recovery. The €250 million dividend recap transaction in 2023, followed by a debt-funded acquisition in 2024, has lifted leverage from 2.4x to 4.3x and illustrates the company and its sponsor’s aggressive financial policy. See Octus’ analysis of Guala Closures’s €150 million tap issuance HERE. The covenant analysis on the original €350 million senior secured floating-rate notes due 2029 is available HERE.

Ferigoni’s floating-rate bonds are priced slightly above par, which in our view underpins the company’s robust business profile, which is diversified by region and by products with the cyclicality of the luxury paper and packaging segment mitigated by the more resilient and stable self-adhesive segment. Given the high margin of 6.125% over Euribor, these notes could be refinanced as early as possible to take advantage of the more buoyant market and lower pricing environment at present. The notes are currently callable at 101 and at par from January 2026.

See Octus’ primary analysis on these bonds HERE.

Ardagh’s PIK notes are indicated in a range of 5 to 7 points, down by about 10 points in the last three months, according to Solve, reflecting expectations they could be wiped out in an upcoming restructuring. The unsecured notes, which appear to be the fulcrum security of the capital structure, could face an impairment in the range of 50% to 60% via a debt equitization, according to sources. They are indicated at about 53. The senior secured notes, which could be fully reinstated under a debt restructuring plan, are trading at 90, up by a couple of points in the last three months. Ardagh Metal Packaging’s 2028 secured and 2029 unsecured bonds are relatively stable at 91 and 87, respectively. Buy-siders have been expecting negotiations to gain momentum since late last year. See Octus’ latest analysis on Ardagh, published on Jan. 30, HERE.

The following price movers report is generated using Credit Cloud by Octus. To access the full report, click HERE.
 

The table below is the pricing summary of packaging bonds discussed in this report
 

 

With the exception of Kloeckner Pentaplast and Ardagh, which are already in talks with their creditors, upcoming maturities do not appear challenging, with only SIG Combibloc having to address a 2025 maturity and Sappi and Crown in 2026.

Swiss aseptic packaging group SIG Combibloc has already addressed the maturity of its €500 million term loan due in June 2025, mainly through the issuance of Schuldschein notes, but has yet to address the €550 million of unsecured bonds due in June 2025. These notes are trading at par and yielding 2.5%.

In 2024, to prepay a €550 million term loan due in June 2025, the group used available cash and proceeds from a €450 million Schuldschein issuance. See Octus’ coverage of the company HERE.
 

Pro-Gest Fails to Address December 2024 Bond Maturity

Pro-Gest’s senior unsecured notes due December 2024 exchanged hands at 15 after the company announced on Jan. 10, that it entered Italy’s out-of-court debt workout process, composizione negoziata della crisi di impresa, or CNC. The proceeding grants the company protection against potential enforcement action, buying it time to present a restructuring proposal.

It however means that debt negotiations may be stuck in Italian courts for months if not years.

Stakeholders must also weigh their next move after Bloomberg reported that a draft report by audit firm Deloitte, commissioned by Pro-Gest’s creditor Carlyle, identified potential anomalies totaling €81.6 million, including 16 covenant breaches and 29 transactions where funds were allegedly used for non-business purposes.

Kloeckner Pentaplast Working on A&E Proposal

Kloeckner Pentaplast’s debt is about to go current with the €120 million senior secured RCF maturing in January 2026, the $725 million and €600 million senior secured term loan Bs maturing in February 2026, the €400 million senior secured notes maturing in March 2026 and the €300 million senior notes maturing in September 2026.

Last week, the plastic packaging group entered into an agreement with 75% of its senior unsecured noteholders to refinance the existing notes with new second lien notes due 2029, with cash interest of 6.5% + PIK. As of Feb. 19, 78% of the senior noteholders are now supporting the agreement.

In Octus’ view, the transaction appears like “step 1” of an A&E, with the company and its sponsor now able to focus on negotiating with the secured debt creditors. The size of the equity injection seems to be the key parameter to broker a deal.

Last month, Octus revealed that Rothschild had been hired to work alongside Goldman Sachs to prepare an A&E proposal. The sponsor is willing to put in around €100 million of equity and may subordinate or equitize the €110 million plus of SUNs it holds to get a deal over the line. See Octus’ analysis of a potential A&E transaction HERE.

Ardagh Group Reportedly Planning a Restructuring to Address Upcoming Maturity Wall

To address $6.7 billion of notes due in 2026 and 2027, which span Ardagh Group and holdco ARD Finance, Ardagh Group is expected to enter restructuring negotiations in advance of maturities, Octus reported. The glass packaging business announced on Jan. 7, that it had added two members with restructuring and insolvency backgrounds to its board.

The company’s options to address this maturity wall are limited after utilizing its last material unencumbered asset (its equity stake in Ardagh Metal Packaging) to repay its $700 million of notes due April 2025, via an LME transaction backed by Apollo.

Ardagh’s subsidiary, Ardagh Metal Packaging, has scheduled its fourth-quarter earnings release and conference call for Thursday, Feb. 27. Ardagh Group, which generally issues a separate press release on the same day, has not yet scheduled its own fourth-quarter release. This adds to speculation that the company may prefer to delay its results release in order to present a restructuring deal, or to avoid questions on this topic.

Trivium Packaging’s euro-denominated senior secured notes are maturing in August 2026, alongside dollar-denominated bonds, or in about 18 months. The group did not address in its last call how it plans to tackle these maturities.

Trivium Packaging, is 42% jointly owned by Ardagh Group and Ontario Teachers’ Pension Plan and is reportedly up for sale, with Bloomberg reporting in September last year that the buyout firm was looking to finalize a deal “in the coming weeks.” Octus’ Coverage of Trivium Packaging is HERE.
 

Since July last year and Crown Holdings’ issuance of €600 million senior unsecured notes with a 4.5% coupon, there hasn’t been any new euro-denominated issuance in the European high-yield packaging space.

Crown Holdings is a regular issuer of euro-denominated bonds for at least the last 20 years. As of Sept. 30, 2024, 48% of its $7.5 billion debt pile is euro-denominated. Its European Beverage segment generated 18% of the $12.9 billion consolidated sales in 2023. See Octus’ coverage of Crown Holdings HERE.
 

Packaging Industry Continues to Face Overcapacities, Pricing Pressures and Margin Squeeze

Destocking has negatively impacted the packaging industry since 2022. While most companies under our coverage report that this phase has now ended, they remain cautious about forecasting a significant rebound in volumes.

Despite a modest pickup in volumes in 2024, overcapacity combined with high input costs has weakened industry margins.

Paper packaging issuers have generally been the most affected, with average margins falling from nearly 20% in 2022, to around 12% currently. This was driven by their inability to pass on rising input costs to customers.
 

In contrast, the metals, glass and plastic packaging subsegment has maintained healthier margins in the inflationary costs environment. Companies in this category have mitigated volume pressure through geographic and customer diversification, a more favorable price mix/cost, price increases and cost-saving initiatives.
 

Rising Capex and Free Cash Flow Constraints

Weaker operating profits coupled with high capital expenditures have impacted cash generation across the industry, with the Octus “Core Cash Flow” margin, which compares levered free cash flows to adjusted EBITDA, being negative.
 

Weaker operating profits and high capex spend has led to increased leverage across the industry.

 

The credit metrics summary table for all European packaging companies available on Fundamentals by Octus is shown below: