TEXT-Fitch cuts Stora Enso to 'BB-'; outlook stable
(The following statement was released by the rating agency)
July 26 - Fitch Ratings has downgraded Stora Enso Oyj's (Stora Enso) Long-term foreign currency Issuer Default Rating (IDR) and senior unsecured rating to 'BB-' from 'BB'. The Outlook is Stable. The agency has also affirmed the Short-term IDR at 'B'.
The downgrade mainly reflects the poor market conditions and Stora's weak operating performance. In H112, Stora's recurring EBIT dropped by 42% compared to the previous year, mainly driven by the poor performance in the Printing and Reading division and by low pulp prices.
Fitch expects the outlook for the pulp and paper markets in Europe to remain challenging. Following the sharp decline in H211, pulp prices partially recovered during H112, but remained far lower than the previous year levels. In addition, the positive trend is now reverting again, on the back of worsening macroeconomic conditions in Western Europe and weakening demand from Asia, and pulp prices declined slightly in July. Although this drop could just be a normal seasonal fluctuation and re-stocking could sustain prices in Q312, Fitch does not expect any material recovery to happen in the short term.
The agency does not expect Stora's operating performance to materially improve in H212 vs. H112, although some cost-cutting measures could start having effects in Q412. Therefore, Fitch forecasts the operating result to be lower than in 2011 and worse than the agency's previous expectations. Coupled with the strong increase in capex, due to the new investment in China, this will likely cause free cash flow to turn negative and leverage ratio to deteriorate faster than previously expected. In particular, Fitch expects funds from operation (FFO) adjusted leverage to increase to approximately 5.0x and 4.0x on a gross and net basis, respectively, a level that is not compatible with a 'BB' rating. In the absence of a significant turnaround in the market, the agency does not expect this ratio to materially improve in coming years.
Stora's credit profile is still in the 'BB' rating category. The new investment will materially improve the business profile in the long term, reducing Stora's dependency on the structurally declining sector of publishing paper and increasing its presence in growth markets and segments. However, the new investment plan also entails significant execution risk, with possible cost overruns and/or delays in the completion of the new plants. In addition, Stora remains vulnerable to the structural long-term decline in the European publishing paper segment.
Stora's liquidity profile remains strong, supported by available cash of EUR1,240m at end June 2012 and by an undrawn revolving credit facility of EUR700m, maturing in 2015. Maturities for 2012 amount to less than EUR500m. The first significant bond maturity is in 2014, when EUR413m (net of the bought-back amount) of bonds comes to maturity. In 2012, Stora issued a new seven-year EUR500m bond in February and two five-years bonds (SEK1,350m and SEK350m, respectively) in June, aimed at improving its maturity profile and duration and increase available liquidity.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- Better trading conditions and operating performance, leading to an improvement of credit metrics, in particular, with FFO adjusted gross leverage to improve to below 4.0x on a sustained basis and EBIT margin above 6% through the cycle.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
-An increase in leverage, with FFO adjusted leverage remaining above 5.0x on a sustained basis.
- A deterioration in profitability, with recurring EBIT margin falling below 5% through the cycle.
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