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TEXT-S&P report says outlook for EMEA forest products cos is stable
Oct 05 - In a report published today, titled "Outlook Stable For European Forest Products Companies, Despite Soft Paper Markets And Economic Headwinds", Standard & Poor's Ratings Services said that it anticipates broadly stable credit trends this year for the 10 forest products companies it rates in Europe, the Middle East, and Africa. This is despite challenging market conditions in Europe for graphic paper and wood products, volatile input costs, and economic risks for this very cyclical industry. However, a combination of recent positive restructuring initiatives, cost-cutting implementations, and strengthened liquidity profiles underpin our expectations of stable ratings performance. As a result, we believe that the sector is better equipped to face an economic downturn than it was in 2008.
All ratings in the sector but one currently have stable outlooks. The exception is Svenska Cellulosa Aktiebolaget SCA (SCA), which we assigned a positive outlook on Oct. 1, 2012, thanks to its improving profitability prospects. In terms of rating actions, there have been no downgrades so far in 2012 and none in 2011, after multiple downgrades in 2006-2010. In fact, we upgraded two companies--Mondi Group in October 2011, and Smurfit Kappa Group PLC in February this year--because of improving business risk profiles and reduced debt. We have revised several outlooks since January 2011, eight in a positive direction and four in a negative direction. In our view, most issuers have some ratings leeway in terms of profitability and financial performance, although we note that the current difficult environment could lead to financial profiles on the low end of our expectations in the coming year.
Although the median rating on European forest product companies is 'BB', the spectrum is wide, from a high of 'BBB+' (SCA) to a low of 'B-' (Norske Skogindustrier ASA and Metsa Board Corp. ). The 10 companies we rate fall into three credit clusters:
-- 'BBB' category companies, which focus on less-volatile end-user products and have financial profiles with modest leverage and sound cash flow generation;
-- 'BB' rated companies that are vulnerable to weak paper markets and have relatively high leverage; and
-- 'B' rated companies that operate in difficult segments and have very high leverage.
We have included SCA in this report card because it has relatively large forest product operations and remains Europe's largest private forestland owner. However, it has reorganized to focus largely on hygiene products and now only about 20% of SCA's annual sales will come from forest products.
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