Sappi Papier Holding GmbH -- Moody's affirms Sappi's Ba2 rating, outlook changed to negative
Rating Action: Moody's affirms Sappi's Ba2 rating, outlook changed to negative
Global Credit Research - 16 Dec 2020
Frankfurt am Main, December 16, 2020 -- 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 senior unsecured notes (due 2023 and 2026) and its B1 rating of the senior unsecured notes (due 2032). The outlook on Sappi and Sappi Papier Holding GmbH has been changed to negative from stable.
A full list of the affected ratings is included at the end of the press release.
"Today's rating action is driven by a substantial deterioration in credit metrics that will remain weak over the next 12 to 18 months as a result of a slower than expected dissolving wood pulp price recovery following a meaningful deterioration that already started in 2018" says Dirk Steinicke, Moody's lead analyst for Sappi. "The currently challenging market environment is additionally impacting some of the group's paper activities, which are suffering from a large decline demand for coated woodfree paper. We hence expect Sappi's credit metrics to remain below the requirements for its current Ba2 rating for the next quarters. However, some price recovery in dissolving wood pulp through 2021, combined with additional capacity ramping up at Sappi's Saiccor mill give us comfort that metrics should improve from current levels over 2021" Mr. Steinicke added.
RATINGS RATIONALE
Moody's has a positive outlook for pulp due to the expectation of rising prices for hardwood and softwood pulp of around 18% during 2021. There is some correlation between pulp prices and DWP prices as swing lines would typically switch to hardwood pulp production. In addition, increasing textile fiber prices further support higher DWP prices as these are substitute fibers for parts of the DWP production.
With regards to Sappi's paper portfolio, we are less confident that Stora Enso Oyj's decision to close coated paper capacity will provide a meaningful benefit to other paper producers as we do not expect demand lost this year to recover. We expect however largely stable paper demand for next year on the back of closures, which should at least provide a floor to pricing.
We expect credit metrics to recover over the course of 2021 and to become again commensurate with the Ba2 CFR from 2022 onwards. Moody's also expects minimal free cash flow generation during this period due to lower EBITDA levels and continued investments into its business transformation. Moody's adjusted debt/EBITDA in FY2021 is likely to remain in the 6-7x while expected more meaningful profitability improvements in 2022 will result in leverage decreasing to 4-5x debt/EBITDA.
We continue to take comfort from Sappi's large scale and leading market positions in many of its business. In addition, management remains focused on strengthening the group's balance sheet, visible also in the full dividend cut. Lastly, liquidity remains solid, and will give Sappi time to finish strategic project that will meaningfully contribute to profit and cash flow generation.
OUTLOOK
The negative outlook reflects the expectation that Sappi's credit metrics will remain weak through its fiscal year ending September 2021. At the same time, Moody's expects Sappi to protect its good liquidity including access to material undrawn revolving credit facilities. Moody's also expects the finalization of the dissolving wood pulp (DWP) project at Saiccor to provide a material EBITDA contribution in Sappi's fiscal year ending September 2022 that should support a deleveraging to below 5x Moody's-adjusted debt/EBITDA.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade Sappi's ratings if (1) RCF/debt remained at around 20%; (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 mid-single-digits in percentage terms; (2) failure to reduce debt/EBITDA, as adjusted by Moody's, to below 5.0x by FY2022; (3) RCF/debt, as adjusted by Moody's, were to sustainably decline towards mid-teens in percentage terms; (4) liquidity were to weaken, for instance, as a result of Sappi not being able to proactively manage its debt maturities.
LIQUIDITY
We consider Sappi's liquidity to be good. As of the end of September 2020, Sappi reported cash and cash equivalents of around $279 million, with access to a total of around $700 million committed revolving credit facilities (RCFs), $116 million of which were drawn, 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 covenant holiday until September 2021 provides some time cushion until Sappi's performance recovers.
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 2020, Sappi reported $154 million in short-term maturities. The next material capital market debt maturity is the E350 million notes in fiscal 2023. The securitization program matures in 2022 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-PD
Outlook Actions:
....Outlook, Changed To Negative From Stable
..Issuer: Sappi Papier Holding GmbH
Affirmations:
....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Ba2
....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed B1
Outlook Actions:
....Outlook, Changed To Negative From Stable
PRINCIPAL METHODOLOGY
The 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 PROFILE
Headquartered 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 2020, the group generated sales of around $4.6 billion across three segments based on regions: Europe (49% of revenue in fiscal 2020); North America (30%); and South Africa (21%). Sappi is listed on the Johannesburg Stock Exchange, with a broad distribution of ownership and a market capitalization of around ZAR18.2 billion as of 4 December 2020.
REGULATORY DISCLOSURES
For 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
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.
Dirk Steinicke AVP Mgr-Rtgs & Research Sup 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
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