TEXT-S&P summary: Dynea International Oy

(The following statement was released by the rating agency)

Sept 28 -

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Summary analysis -- Dynea International Oy ------------------------ 28-Sep-2012

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CREDIT RATING: B/Stable/-- Country: Finland

Primary SIC: Chemicals &

allied products,

nec

Mult. CUSIP6: 26816P

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Credit Rating History:

Local currency Foreign currency

29-Jun-2009 B/-- B/--

09-Aug-2007 B+/-- B+/--

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Rationale

The rating on Finnish chemicals company Dynea International Oy is constrained by Standard & Poor's Ratings Services' assessment of the company's business risk profile as "weak" and its financial risk profile as "aggressive", under our criteria.

We view Dynea's business risk profile as "weak" because of the company's small size, narrow product line, and the related material swings in EBITDA. Dynea provides resins and paper overlays chiefly for the cyclical furniture and construction markets. Raw material input prices are volatile because they are mostly tied to oil or gas prices, including methanol. However, since the 2008-2009 global economic and financial crisis, we understand that Dynea has improved its contractual position to better manage the pass-through of raw-material prices to its customers. Partly offsetting these weaknesses are Dynea's good market share in resins and its fair geographic and asset diversification (Europe generates about 70% of sales and Asia-Pacific, 30%).

We assess Dynea's financial risk profile as "aggressive", reflecting Dynea's improved credit metrics over the past two years and our expectation that the company will better weather the deteriorated macroeconomic conditions, partly owing to the timely pass-through of raw material input costs. However, our assessment continues to factor in the company's high leverage and weak metrics when including a sizable shareholder loan (even though external debt is currently modest). Our assessment also factors in the private-equity ownership, and we anticipate that management may refinance external debt and shareholder loans with increased levels of external debt.

S&P base-case operating scenario

In our opinion, Dynea performed well in the first half of 2012. The company's EBITDA increased by about 16% to EUR31 million on a margin of 7.3%, compared with 6.2% in the first half of 2011. However, we believe that despite this strong start, demand for Dynea's products in the second half of 2012 could be subdued due to challenging macroeconomic conditions in Europe, which accounts for about 70% of the company's sales. Our current economic forecast for the European Economic Monetary Union (EMU or eurozone) assumes negative growth of -0.8% in 2012 and flat growth in 2013. Positively, we understand from management that Dynea continued its healthy performance in the first two months of the third quarter, despite this challenging environment. Nevertheless, in our view, the recession in the eurozone and the uncertain recovery prospects could negatively impact Dynea's main end-markets--construction and furniture. Assuming weak conditions in the second half of 2012, we anticipate full year consolidated EBITDA at about EUR50 million-EUR55 million in our conservative base-case credit scenario. At the same time, following the introduction of new contract clauses in 2010, we think the company will be able to pass on raw-material price changes more quickly.

S&P base-case cash flow and capital-structure scenario In the first half of 2012, Dynea generated weak funds from operations (FFO) of about EUR10 million, partly reflecting the effect of disposals completed during the period. FFO was consumed by sizable working capital outflows of about EUR22 million and capital expenditure of almost EUR6 million, which led to negative free operating cash flow (FOCF) of EUR18 million. Standard & Poor's-adjusted debt of EUR171 million (of which EUR85 million is comprised of shareholder loan), and FFO in the past 12 months of EUR21 million, results in a ratio of adjusted FFO to debt of 12%. This is weak, but commensurate with the current rating.

We anticipate that Dynea's working capital requirements will moderate in the second half of 2012, notably due to the cyclicality of Dynea's business, whereby working capital contracts in the first half of the year and gets released in the second half of the year. However, we also believe that working capital reduction should also occur due to reduced raw material price pressure as a result of the economic slowdown. In addition, we forecast modest capital expenditure at a similar level to that seen in the first half of the year. Nevertheless, we believe that Dynea's negative FOCF could persist at modest levels, as a result of the overall difficult macroeconomic environment.

We understand from management that the company's strategic focus remains on further portfolio streamlining, as Dynea concentrates on higher-margin products. As such, we anticipate further cash inflows from disposals, in addition to EUR29 million already reported in the first half of the year. We note however, that the timing of disposals and the amount of the proceeds is uncertain.

Liquidity

We have reassessed upward Dynea's liquidity profile to "adequate" from "less than adequate", following the May 2012 refinancing, which resulted in a medium-term debt maturity profile. We believe that the ratio of sources to uses over the next 12 months will be about 3.2x.

We estimate that the company's liquidity sources over the next 12 months will include:

-- EUR44 million cash of which we consider EUR25 million as tied to operations (as of June 30, 2012);

-- About EUR6 million available under the new EUR35 million revolving credit facility (RCF). We recognize the recent successful refinancing of the company's bank loans with new facilities, notably the EUR35 million RCF and EUR45 million term loan due 2015; and

-- FFO of about EUR20 million.

Liquidity in the next 12 months will also likely be supported by proceeds from disposals, which in the first half of 2012 amounted to EUR29 million. We anticipate that this amount could increase by year-end 2012.

We estimate that liquidity outflows over the next 12 months will consist of:

-- EUR11 million of short-term debt; and

-- Capital spending, which we estimate to be about EUR10 million-EUR12 million.

At June 30, 2012, Dynea had ample headroom under financial covenants incorporated into its new RCF and term loan facilities. The covenants are set at a net senior debt-to-EBITDA ratio of 2.5x and an interest cover ratio of 3.75x.

Outlook

The stable outlook reflects our belief that Dynea could perform relatively well in the enduring difficult macroeconomic conditions. We anticipate that the company's credit metrics should remain within our guideline for the current rating of adjusted FFO to debt of about 12% and that liquidity should remain "adequate."

In our view, ratings upside is limited at this stage due to our forecast of deteriorating macroeconomic conditions in Europe. We also consider that the corporate reorganization that is currently underway at Dynea creates a degree of uncertainty as to the future structure of the company.

We could lower the rating if Dynea experiences a material negative free cash flow, or if its liquidity deteriorates. However, we do not think that this is likely at this time.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Corporate Criteria: Analytical Methodology, April 15, 2008

-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Criteria Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Key Credit Factors: Business And Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008

-- The Eurozone's New Recession--Confirmed, Sept. 25, 2012