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Recommendation. BUY up to 7% price talk. Novolex is a new packaging name to the high yield bond market, although it has been a well-liked issuer in the loan market for a number of years. This financing is to fund the purchase of the company by Carlyle Group from Windpoint Partners for ~$3 billion, 9.4x our FY16 estimated EBITDA of $323MM (excludes $29MM of unrealized synergies and other misc addbacks). Carlyle believes they are paying ~8.6x including these items in EBITDA. The company has many characteristics desirable to investors size, diversity, strong free cash flow, track record (on both base business and acquisitions), stable management team, and well-regarded sponsor owner. Novolexsleverage is at the high end of the industry, but we are very comfortable with highly leveraged packaging companies, given the historical track record of many issuers, tied to the general stability of the business and ability to generate free cash flow. We do not see any major red flags surrounding Novolex, but highlight two issues to watch closely.Unlike most other packaging companies, Novolex does face potential secular headwinds in the paper and plastic grocery and shopping bags segments due to legislation, consumer preferences and/or imports. We believe the company and industry will continue to be successful providing these bags, but trends need to be watched closely, especially after California recently became the first state to ban the use of, or charge for, plastic bags. Indeed, Novolex has been aggressively acquiring to diversify away from plastic and paper bags, and that leads to our second concern, that the company will strain its operations and balance sheet by being too aggressive on acquisitions. This is heightened by a new owner that just paid a big multiple for it. Not only could an overly aggressive acquisition strategy hurt the company, repeated financings could put pressure on the bonds. Remember how it felt (and the bonds traded) when Reynolds Group did 4 acquisitions (tripling the size of the company) and financings in a 2 year period after its initial entrance to the high yield market? Turning to relative value, there are not many packaging sector bonds above 7% (or even 6% for that matter), lending support to the price talk.With few flexible packaging companies in the high yield market, Novolex provides diversification to a packaging portfolio. Our comp table includes the 3 bellwether names in the sector Reynolds, Ardagh and Berry and Coveris and BWAY. Coveris is the closest comp from a business perspective, another paper and flexible packaging company. Despite much higher leverage, Novolex is a better co and credit, in our opinion, due to its free cash flow characteristics, and should be priced inside of Coveris, which trades to a short maturity. We view BWAY as a good comp in that it is highly levered and very acquisitive, like Novolex.With similar leverage, we believe BWAY is a better co and credit due to the more defensive nature of its business mix, somewhat offset by less free cash flow. Thus we believe Novolex should come wide to BWAY adjusting for the short duration of BWAY bonds, would indicate fair value for Novolex at 7.25-7.50%. This range also feels right for an acquisitive new issuer (with a new owner) to the high yield bond market. While we would like to see 7.25 7.50% based on relative value, we would be a buyer up to 7% based on the strengths of Novolex.At 7%, investors wont get rich, but we believe the downside is protected in a co and credit like Novolex. At 7%, yield per turn of leverage is on average (excluding outlier Coveris) with the other bonds in our comp table. However, we do not feel strongly enough about the company to want to buy the new issue inside 7%. Nonetheless, we can understand why investors would buy this with a high 6% coupon.

After reading the Novolex research report, what are the positives and negatives regarding the company's credit quality. Would you buy the Novolex bonds? Why or why not?

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