Rayonier Advanced Materials (Nasdaq: RYAM) is in trouble with Eastman Chemical, its largest customer that represents 31% of total sales (page F-12). On August 18th, Rayonier filed a Form 8-K disclosing a contractual dispute with Eastman as to whether Rayonier must lower the contract price it charges Eastman for specialty cellulose if Eastman receives bona fide offers from other cellulose suppliers at prices lower than the contract price. Rayonier argues that the “meet or release” clause in its contract with Eastman is limited to a maximum annual quantity of 7,500 metric tons whereas Eastman says the clause applies to the entire contract amount without limitation (Eastman purchased 148,000 metric tons in 2014).

Even if Rayonier’s contractual interpretation is correct and Eastman is just using litigation as a negotiation device, it’s not good news when your largest customer wants out of a contract. Although Rayonier is heavily indebted, the vast majority of its debt does not mature until 2021 and 2024 (page 5), so there appears virtually no risk of bankruptcy even in the unlikely event that Eastman wins the court case.

We are reducing the Roadrunner rating on Rayonier to “Hold” until there is more clarity over the likely result of this contractual battle.