June 11 (The following statement was released by the rating agency)
Fitch Ratings has placed Smurfit Kappa Acquisitions and Smurfit Kappa Treasury Funding's senior secured notes on Rating Watch Negative (RWN) on the expected release of security. Smurfit Kappa Group's (SKG) Long-term foreign currency Issuer Default Rating (BB/Stable) is not affected by this rating action. A full list of the bonds affected by the rating action is at the end of this release.
SKG has announced that it is in discussion with its banks about the refinancing of the outstanding secured credit facility with a new unsecured bank facility. The release of the security on the credit facility will also trigger the release of the security on all the outstanding bonds issued by the controlled companies Smurfit Kappa Acquisitions and Smurfit Kappa Treasury Funding.
Fitch currently rates the secured notes one notch higher than SKG's IDR, incorporating the benefit from the security and the collateral. The release of the security on the bonds would imply that the one-notch uplift was no longer justified and Fitch would rate the unsecured notes at the level of the IDR. For this reason, Fitch has placed the secured notes on RWN. The completion of the refinancing and the release of the security will result in the resolution of the RWN and the equalisation of the instrument ratings with the IDR.
KEY RATING DRIVERS
-Improved Debt Profile
Fitch views the refinancing as positive, as it will complete the transformation of the group's debt structure from a "leveraged finance" style into a more simple structure. After the refinancing, all long-term debt will be unsecured and will continue to rank pari passu. Although representing a credit positive, the refinancing by itself is not enough to drive an immediate positive rating action on the IDR. Fitch will review SKG's ratings in the next few weeks, as part of its normal review cycle.
SKG continues to show steady deleveraging and improvement in its credit metrics. Funds from operations (FFO) gross leverage improved in 2012 to 3.9x from 4.3x in 2011. Fitch expects this metric to further improve to 3.6x in 2013, notwithstanding the expected increase in capex to a normalised level of 95%-100% of depreciation. SKG's credit metrics have ample margins within the current rating category.
Positive: Future developments that could lead to positive rating actions include:
- The continuation of the current path in debt reduction and the improvement in credit metrics, with FFO adjusted leverage improving to below 3.5x, free cash flow (FCF)/revenue remaining above 1% and FFO interest coverage increasing to above 3.0x.
Negative: Future developments that could lead to 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.
FULL LIST OF RATING ACTIONS:
The following instruments' 'BB+' ratings have been placed on RWN:
Smurfit Kappa Acquisitions
EUR500m notes due 2017
EUR200m and USD300m notes due 2018
EUR500m notes due 2019 EUR400m and EUR250m notes due 2020
Smurfit Kappa Treasury Funding
USD292m notes due 2025