Rating Action: Moody's affirms Sappi's Ba2 rating, outlook changed to stableGlobal Credit Research - 08 Dec 2021Frankfurt am Main, December 08, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Ba2 corporate family rating (CFR) of Sappi Limited (Sappi), as well as its Ba2-PD probability of default rating (PDR). Concurrently, the rating agency has affirmed the ratings of the instruments issued by Sappi's guaranteed subsidiary Sappi Papier Holding GmbH: its Ba2 ratings of the guaranteed senior unsecured notes (due 2026 and 2028) and its B1 rating of the guaranteed senior unsecured notes (due 2032). The outlook on Sappi and Sappi Papier Holding GmbH has been changed to stable from negative.A full list of affected ratings can be found at the end of this press release.The rating action was triggered by a material strengthening in Sappi's key credit metrics as per end of its fiscal year 2021 with Moody's adjusted EBITDA margin improving to 9.7% and Debt / EBITDA decreasing to 5.3x. Moody's expects further material improvement during 2022 on the back of a supporting market environment and the additional contribution from the expansion of its Saiccor mill. These improvements will bring credit metrics to levels more appropriate for the Ba2 rating.RATINGS RATIONALESappi's operating performance has materially improved during 2021 on the back of increasing Dissolving Pulp prices, from the trough experienced in 2020, combined with higher volumes on Packaging and Specialities segment. The currently favourable operating environment fuelling recovery in demand for coated woodfree paper is also expected to benefit its graphic paper segment as illustrated by high utilization rates that provide pricing power to paper producers and will lead to improving operating performance in the segment during 2022.In addition, operating performance will be positively affected by the start-up of incremental new production at its Saiccor mill, that started during calendar Q4 2021, and is expected to increase Sappi's DWP production by 110,000 tonnes. Furthermore, increasing textile fiber prices further support higher DWP prices. With regards to Sappi's paper and packaging portfolio, Moody's expects that increasing volumes and prices in both business segments will lead to higher revenue and stronger profitability during 2022. We remain cautious however that the current strong momentum for paper products may start to fade as we move through 2022, which may require additional closures and/or restructuring to protect pricing.Other supporting factors are management's focus on strengthening the group's balance sheet, visible also in the full dividend cut and Sappi's solid liquidity which will give Sappi the necessary capacity to finish projects that will meaningfully contribute to profit and cash flow generation.The Ba2 CFR of Sappi is primarily supported by its sizeable scale, with around $5.3 billion of sales in the fiscal year ended 30 September 2021 (fiscal 2021); leading market positions globally in the production of coated paper and dissolving wood pulp (DWP), and strengthened offering in speciality and packaging papers; solid geographical diversification, with operations across Europe, North America and South Africa (Ba2 negative); good degree of vertical integration into pulp and energy; and strategy to diversify into structurally growing businesses while maintaining a solid balance sheet, with a commitment to keep reported net debt/EBITDA (as defined by Sappi) below 2.0x, compared with 3.7x in fiscal 2021.The major constraint on Sappi's Ba2 CFR is its still-sizeable exposure to the graphic paper business, which is structurally declining in mature markets and requiring constant restructuring and capacity reductions. Sappi's DWP and speciality and packaging paper businesses serve markets with good underlying fundamental growth prospects, but they are to a large extent commodities, subject to fairly volatile market prices, which may lead to some degree of volatility in credit metrics. Moreover, Sappi needs to maintain its financial discipline in deleveraging towards its stated net leverage target, remaining focused on reducing debt and maximising cash generation in the context of its 2025 strategy.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSMoody's takes into account the impact of environmental, social and governance (ESG) factors when assessing companies' credit quality. Although the pulp and paper industry is a fairly large consumer of energy and water in production processes with occasional environmental incidents, we assess that it has moderate exposure to environmental risk.OUTLOOKThe stable outlook reflects the expectation that Sappi will be able to further improve its credit profile over the next 12-18 months so that its Moody's adjusted debt/EBITDA will improve towards 4.0x with Moody's adjusted RCF/debt remaining above 15% during its 2022 fiscal year. It is also supported by the group's solid liquidity position with material funds at hand of around USD1.1 billion from cash on balance sheet and undrawn credit lines.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's could upgrade Sappi's ratings if (1) RCF/debt remained at around 20% on a sustained basis; (2) EBITDA margins, as adjusted by Moody's, are sustained at around 15%; (3) Moody's-adjusted debt/EBITDA moving towards 3.0x.Moody's could downgrade the ratings, if Sappi's (1) EBITDA margin, as adjusted by Moody's, were to sustainably decline towards single-digit in percentage terms; (2) debt/EBITDA, as adjusted by Moody's, were to increase above 4.0x on a sustained basis; (3) RCF/debt, as adjusted by Moody's, were to sustainably decline towards mid-teens in percentage terms; (4) liquidity were to weaken.LIQUIDITYWe consider Sappi's liquidity to be good. As of the end of September 2021, Sappi reported cash and cash equivalents of around $366 million, with access to a total of around $730 million committed revolving credit facilities (RCFs), which were fully undrawn, in South Africa and Europe, including a E525 million RCF maturing in March 2023. While part of the group's non-South African bank debt, the securitization borrowings and the RCFs all contain financial covenants, the new covenant package provides sufficient headroom to Sappi.These sources, together with funds from operations, should comfortably cover Sappi's working capital needs and elevated capital investment requirements. As of the end of September 2021, Sappi reported $87 million in short-term maturities. The next material capital market debt maturity is the E450 million guaranteed senior unsecured notes in fiscal 2026. The securitization program matures in 2024 and is typically renewed every two years to maintain the long-term treatment, and its ability to do so in future is critical to maintain the Ba2 rating. LIST OF AFFECTED RATINGS: ..Issuer: Sappi Limited Affirmations: .... LT Corporate Family Rating, Affirmed Ba2.... Probability of Default Rating, Affirmed Ba2-PDOutlook Actions:....Outlook, Changed To Stable From Negative..Issuer: Sappi Papier Holding GmbHAffirmations:....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed B1....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Ba2Outlook Actions:....Outlook, Changed To Stable From NegativePRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Paper and Forest Products Industry published in October 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1105007. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in Johannesburg, South Africa, Sappi Limited (Sappi) is one of the leading global producers of coated fine paper and DWP, along with a growing product offering in speciality and packaging papers. In fiscal 2021, the group generated sales of around $5.3 billion across three segments based on regions: Europe (47% of revenue in fiscal 2021); North America (31%); and South Africa (22%). Sappi is listed on the Johannesburg Stock Exchange, with a broad distribution of ownership and a market capitalization of around ZAR24.9 billion as of 2 December 2021.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Oliver Giani Vice President - Senior Analyst Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Anke Rindermann Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.