TEXT-Fitch affirms Smurfit Kappa; rates prospective senior secured floating rate notes

Sept 18 - Fitch Ratings has assigned Smurfit Kappa Group's (SKG) prospective 2020 senior secured floating rate 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 EUR200m and USD300m Smurfit Kappa Acquistions's notes' rating due 2018 has been confirmed at 'BB+', following the receipt of the final documentation.

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 credit facility 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+'

SKG is refinancing part of its senior credit facility with the offering of a new EUR200m senior secured floating-rate bond, with an eight-year tenor. The new notes will be issued by the financial subsidiary Smurfit Kappa Acquisitons and will rank pari passu with the existing senior credit facility, senior secured notes (due in 2017, 2018 and 2019) and the US Yankee bond due in 2025, sharing the same guarantees and collateral.

The new issue will be neutral in term of gross and net leverage, as the proceeds of the EUR200m will be almost entirely used to pre-pay EUR96m of each of tranche B and C of the senior credit facility, maturing in 2016 and 2017 respectively. The new issue will further improve SKG's average debt duration and maturity profile.

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 revolving credit facility 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 funds from operations (FFO) adjusted leverage to below 3.5x, maintaining free cash flow (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 deterioration in trading conditions or to M&A activity, with FFO adjusted leverage worsening to above 4.5x.