Fitch Ratings said the industry outlook for European packaging remains challenging, with some companies better placed than others to weather higher input prices and/or slowing growth.

Failure to pass through raw material and transportation cost inflation, together with an inability to generate sufficient mitigating cost efficiencies are the hallmarks of weaker credit quality for highly leveraged packaging producers, for whom the margin of error is limited, Fitch said.

Fitch said the volatility in raw material prices has resulted in considerable working capital requirements, which, combined with the capital-intensive nature of the industry, is putting pressure on free cash-flow generation.

The packaging converters have also been focused on economies of scale, cost containment, rationalisation and productivity gains, the ratings agency added.

Fitch said, although, the risk of imminent formal payment defaults is somewhat offset by the liquidity available and a lack of substantial scheduled debt repayment for many of the issuers in the next 1-2 years.

But, a failure to deliver on deleveraging targets over the life of one's credit facilities increases underlying financial risk, Fitch said.

The ratings firm said hence there is limited ratings headroom available for some of the highly leveraged European packaging producers.