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Moody's Investors Service on Monday affirmed the Ba3 Corporate Family Rating (CFR) of pulp and paper group Sappi (Sappi, SAP) and assigned a provisional (P)Ba2 rating to the proposed senior secured notes worth US$680 million to be issued by Sappi Papier Holding GmbH in two series due 2018 and 2021 respectively.
Moody's changed the rating outlook to positive from stable.
“The ratings on Sappi's existing senior secured and senior unsecured debt remain unchanged, though we expect minor changes to the respective LGD rates. The rating on the US$500 million global bond maturing in 2012 is expected to be withdrawn following repayment from the issuance proceeds.
“This rating action assumes a successful placement of the envisaged additional bonds, which provides Sappi with an improved debt maturity profile and which Moody's has incorporated into its analysis,” the rating group said.
Moody's said it issued provisional ratings in advance of the final sale of securities and these ratings reflected its preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's added that it would endeavor to assign a definitive rating to the debt instruments.
The group said that the affirmation of the Ba3 CFR reflected the considerable turnaround in Sappi's operating performance and credit metrics from the trough levels in 2009. “We note that the recovery has in particular been driven by the group's South African and North American operations, which benefited from improved product pricing, higher demand levels and high pulp prices, given the group's long position in pulp in these regions. Current credit metrics such as RCF/Net debt in the high teens and earnings before interest, tax, depreciation and amortisation (ebitda) margins around 12% position the company with some headroom in its current rating category,” it said.
Moody's noted that the positive outlook was based on Moody's expectation that the rating could be upgraded over the next quarters should Sappi be able to sustain recent improvements in particular in its North American fine paper and South African forest and pulp operations.
With the European operations still lagging the recovery observed in the other divisions, Moody's added that the positive outlook also considered the potential for a clearly improved market balance following the announced restructuring measures. “These measures could include the planned closure of 500,000 tonnes of fine paper capacity and by thus remove a large part of the structural overcapacity in the European market. The positive outlook also reflects the proactive approach in managing the group's debt maturity profile if implemented as announced,” the group said.
Moody's pointed out that despite the turnaround in Sappi's performance achieved so far, the company remained exposed to some structural challenges in the paper industry as the secular demand decline trend for paper continues unabated. In addition, elevated input costs, which potentially would rise further, remained a burden for profitability levels going forward, if companies were not able to pass these on to customers in a timely fashion. “Also, we caution that there are costs related to the announced restructuring measures that will burden profitability in the short term before any benefits on the back of a tighter demand and supply balance will filter through,” it said.
“The ratings could be upgraded over the next quarters should Sappi be able to sustain recent improvements in credit metrics through further improvements in particular in the European division, such as RCF/ debt above 15% and ebitda margins above 12% as well as continued positive free cash flow generation,” Moody's said.
It further cautioned that downward pressure would likely be exerted on the rating if Sappi's operating performance and cash flow generation were to deteriorate substantially, resulting in a weakening of existing credit metrics, such as ebitda dropping to the single digit percentages, RCF/Debt falling towards the single digits, or ebitda-capex to interest expense below 1.0x.
The proceeds of the notes issuance would be used to repay the remaining portion of the US$500 million bond due in 2012, of which, following a tender offer earlier this year, US$350 million was still outstanding. The remainder would be applied towards a partial repayment of about EUR200 million under the OeKB term loan facility and to cover transaction-related fees and expenses. “In addition, we note that Sappi has replaced the EUR209 million existing revolving credit facility, which was set to mature in 2012, with a new EUR350 million facility maturing in 2016,” Moody's said.
The (P)Ba2 (LGD 3, 38%) rating assigned to the senior secured notes was one notch above Sappi's Ba3 CFR and reflected the relative seniority and security package of the new instruments in Sappi's capital structure. The proposed notes benefited from the same guarantee and security package as Sappi's existing senior secured debt, including the EUR300 million and USD350 million senior secured notes maturing 2014, the remaining portion of the OeKB term loan, the new revolving credit facility as well as certain other indebtedness, Moody's said.
“These aforementioned instruments benefit from upstream guarantees on a senior basis of essentially all material operating subsidiaries of Sappi's international business, excluding South African operations. In addition, these instruments are partially secured as they benefit from a first-lien security interest in certain of Sappi's subsidiaries' property, plant and equipment, real estate and inventories, as well as share pledges on the stock of certain of Sappi's operating subsidiaries. Furthermore, the notes will benefit from a senior downstream guarantee provided by the ultimate holding company Sappi Ltd,” the ratings group said.
The ratings of the existing USD250 million global bond due 2032 issued by the holding company Sappi Papier Holding GmbH were affirmed at B2.
“The instrument is rated two notches below the CFR reflecting the effective subordination relative to the considerable amount of senior secured debt ranking ahead in the capital structure with a closer proximity to operating cash flows and assets. The notes only benefit from a downstream guarantee by the ultimate holding company Sappi Ltd. on an unsecured basis,” it said. - I-Net Bridge