Plastic use is the environmental issue of the moment. Campaigners have long argued against the use of single-use plastics and sought to highlight the scourge that they create on the natural world.
But it was a BBC documentary, Blue Planet II, that produced a literal sea change in how the US, Europe and UK view plastics. The documentary graphically highlighted the extent to which plastics have infected food chains and the immense suffering that they inflict on sea creatures.
The response from consumers has been stark with many changing their usage of plastic swiftly. Companies have been equally quick to put in place policies that cut down on the use of plastics. Governments too are reacting with the UK and Europe both announcing strategies to regulate plastics.
In spite of this the investment community has been slow to react. Many investment managers have talked up the need to act on the issue but that rhetoric has not necessarily been reflected in portfolios.
Winners and losers
This is surprising. There are likely to be some clear winners and losers amongst plastic manufacturers. Simply put, those with the capital to invest in the production of more sustainable forms of plastics, or limited exposure to single use plastics stand to prosper compared to less well capitalised companies producing a lot of this form of plastic who will struggle to adapt.
The US high yield debt universe includes a good number of companies producing single use plastics. They represent almost all of the production of Sealed Air Corporation. Their bonds are rated BB+/Ba3 and are supported by strong free cash flow generation of around $400 million, a solid balance sheet with a net leverage target of between 3.5-4x and some market leading products.
But perhaps most crucially they are investing in ways to adapt to a world intent on using plastic more sustainably. They have brought together their work on product innovation with their sustainability, which essentially means the development of new products is always viewed through the lens of sustainability.
The company is also running various initiatives aimed at increasing the amount of their materials that can be recycled and developing bio-materials can be recycled or degrade much quicker than petroleum based products.
Not all companies are quite so forward-thinking though. There are companies in the US high yield market running at over 6.5x leverage and dedicating two thirds of their production to single-use plastics. They are in a precarious position and will face stark choices about the direction that they want – and are able – to take in the future .
What applies to the US high yield market does not apply to all jurisdictions. Asian consumers have been almost silent on the issue of single-use plastics so there is little catalyst for change in companies in the region.
The very raw outrage that many consumers in the west feel about plastic might fade over time. But companies and governments are moving in a direction that means that some of the change that is being called for is likely to be durable. The investment community needs to rush to catch up with how the mood on plastics has changed.
30 years in Luxembourg