TEXT-Fitch assigns Smurfit Kappa's prospective notes 'BB+(EXP)' expected rating

Mon Sep 3, 2012 5:03am EDT

Sept 03 - Fitch Ratings has assigned Smurfit Kappa Group's (SKG) prospective senior secured notes, to be issued by Smurfit Kappa Acquisitions, an expected rating of 'BB+(EXP)'. The final rating is contingent on the receipt of final documents conforming to information already received.

The agency has also affirmed SKG's Long-term foreign currency Issuer Default Rating (IDR) at 'BB', with a Stable Outlook, and the following SKG-related entities' ratings:

Smurfit Kappa Acquisitions' senior secured facilities affirmed at 'BB+

Smurfit Kappa Acquisitions' guaranteed senior secured notes affirmed at 'BB+'

Smurfit Kappa Treasury Funding's senior secured notes due 2025 affirmed at 'BB+'

Smurfit Kappa Funding's senior subordinated notes due 2015 affirmed at 'BB-'

SKG is refinancing its 7.75% senior subordinated notes due 2015 (issued by Smurfit Kappa Funding ) with a new EUR400m equivalent dual-tranche senior secured notes offering. The new notes will be issued by the financial subsidiary Smurfit Kappa Acquisitons and will rank pari passu with the existing senior credit facility (Tranche B and C maturing in 2016 and 2017 respectively), senior secured notes (due in 2017 and 2019) and the US Yankee bond due in 2025, sharing the same guarantees and collateral (apart some subsidiaries in Spain and Argentina that are not guarantors of the new notes). The offering comprises a EUR200m tranche and a USD250m tranche.

The new issue will be neutral in term of gross and net leverage, as the proceeds of EUR400m equivalents will be entirely used to redeem the two subordinated notes (with a principal of EUR217.5m and USD200m respectively) and pay some additional costs (including redemption costs, accrued interest and transaction costs). However, the new issue will improve SKG's debt average duration and maturity profile. Following the refinancing, the first relevant debt maturities will be the EUR250m (of which EUR219m was used as of end-June 2012) receivable securitisation programme in 2015 and the EUR696m Tranche B of the senior credit facility in 2016.

The redemption of the subordinated notes will simplify the financial structure of SKG, with basically all the long-term bank debt and bonds being senior secured and ranking pari passu.

The affirmation of SKG's ratings and Stable Outlook reflect its healthy performance in H112, with a continuous improvement in credit metrics and leverage ratios despite the unfavourable macroeconomic environment. Fitch expects the corrugated packaging market to remain weak in H212, but this should have little impact on the ratings, as SKG's credit metrics have ample margins within the current rating category. SGK's ratings are also supported by its strong liquidity, backed by EUR502m of unrestricted cash as of end-June 2012 and by a fully undrawn EUR525m RCF maturing in 2016.

WHAT COULD TRIGGER A RATING ACTION?

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

- The continuation of the current path in debt reduction and the improvement in credit metrics could lead to an upgrade. In particular, the improvement of FFO adjusted leverage to below 3.5x, maintaining FCF/revenue above 1% and FFO interest coverage above 3.0x could lead to positive rating action.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

- A material deterioration in the operating performance, with sustained negative FCF

- A re-leveraging of the group, due to either a deterioration in trading conditions or to M&A activity, with FFO adjusted leverage worsening to above 4.5x.

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