(The following statement was released by the rating agency)
Nov 30 -
Summary analysis -- Lecta S.A. ------------------------------------ 30-Nov-2012
CREDIT RATING: B+/Stable/B Country: Luxembourg
Primary SIC: Converted paper
Credit Rating History:
Local currency Foreign currency
22-Oct-2007 B+/B B+/B
29-Jan-2007 BB-/B BB-/B
he ratings on Luxembourg-registered paper producer Lecta S.A. reflect our view of the company’s “fair” business risk profile and “aggressive” financial risk profile. They also reflect the company’s limited integration in pulp and exposure to the cyclical, competitive, and challenging European coated woodfree (CWF) paper market. We consider these weaknesses to be partly offset by a good market position--including major cost advantages derived from the company’s proximity to key end-markets--access to a modern, flexible asset base, and a focused business and financial strategy. In addition, we view Lecta’s strong liquidity position as a key supportive factor for the ratings.
We do not factor in any potential benefit or disadvantage from an exit by the current owners into our assessment of the company because we would consider such a development to constitute “event risk”.
S&P base-case operating scenario
Lecta’s 12-month EBITDA margin as of Sept. 30, 2012, stood at 9.5%, slightly lower than at the end of 2011. For 2012, we currently forecast a slight increase in sales with a minor drop in selling prices for coated fine paper. Under current market conditions and despite high input costs, we view the possibility for the company to implement meaningful price increases as relatively low in the short term. We anticipate that Lecta’s EBITDA will drop slightly in 2012 from that in 2011 and that the EBITDA margin over the near term will stand between 8.5% and 11%. Downside risk to our base case relates primarily to weaker-than-expected demand and lower selling prices for coated fine paper, due to economic pressures. Continued high net energy costs is another potential factor that could weigh on the company’s profitability. We note, however, that Lecta’s low level of pulp integration will be beneficial over the near term if pulp prices decline further or stabilize at current levels, because input costs will decrease. Furthermore, any additional industry capacity closures could help maintain stable selling prices even if demand declines, as we currently forecast.
S&P base-case cash flow and capital-structure scenario
In our base-case scenario, we forecast that the ratio of Lecta’s funds from operations (FFO) to debt (after our adjustments) will stand in the range of 16%-20% over the near term compared with about 19% in 2011. We anticipate an increase in Lecta’s capital expenditures to EUR40 million-EUR60 million. The company has previously publicly stated that its board has authorized it to identify exit opportunities for the current owners. We note, however, that discussions with a prospective buyer were terminated in September 2011.
The integration of the recently acquired Italian-based paper merchant Polyedra is going as planned. This acquisition will reinforce Lecta’s strong position in paper merchanting where the company is investing. We are not expecting the company to engage in significant acquisitions in the near term.
We currently assess Lecta’s liquidity position as strong as the ratio ofsources to uses exceeds 1.5x in our base case over the next two years. However, we could lower our assessment to adequate if the company were to consume substantial cash amounts.
As of Sept. 30, 2012, the company’s liquidity resources consisted of around EUR182 million in cash and a further EUR80 million in an unused super senior revolving credit facility that has been renegotiated this year.
We consider a cash position of at least EUR40 million necessary for the sustainable operations of the company. Earlier this year, the company extended its existing debt maturities by redeeming existing bonds and issuing EUR200 million of senior secured fixed rate notes, maturing in 2019, and EUR390 million of senior secured floating rate notes, maturing in 2018. In our financial base case, we expect Lecta to maintain its liquidity position over the near term through positive free operating cash flow. These resources easily cover Lecta’s negligible short-term debt maturities because most of the company’s maturities are concentrated in 2018.
We have assigned a ‘B+’ issue rating to the EUR200 million senior secured fixed rate notes, due 2019, and the EUR390 million senior secured floating rate notes, due 2018, issued by Lecta. The recovery rating on the notes is “4”, reflecting average (30%-50%) recovery prospects for senior secured noteholders in an event of default.
The EUR200 million senior secured fixed rate notes and EUR390 million senior secured floating rate notes will rank pari passu with themselves but will be junior to the EUR80 million super senior RCF (as per the intercreditor agreement in place). The senior secured notes and the RCF are guaranteed and secured debt instruments.
The recovery ratings are supported by our valuation of the company as a going concern, reflecting Lecta’s good market position, despite our view that Luxembourg’s insolvency regime is relatively unfavorable for creditors. The recovery rating on the senior secured notes reflects our assessment of the security package as rather weak and the presence of a comparatively high level of prior-ranking debt.
To determine recoveries, we simulate a hypothetical default scenario. We assume that a default would stem from high financial leverage, leading to a reorganization of the company. Based on a combination of discounted cash flow and stressed market multiples, we estimate the company’s stressed enterprise value to be about EUR430 million at our hypothetical point of default in 2015.
The stable outlook reflects our expectation that Lecta’s credit measures will remain at levels that we view as rating commensurate. We see a ratio of FFO to debt exceeding 12% and adjusted debt to EBITDA of less than 5x as commensurate with a ‘B+’ rating. The stable outlook does not factor in any event risk associated with the exit of the current owners. However, a sale of the company would trigger a review of the ratings.
The ratings would likely come under pressure if Lecta’s gross margin drops sufficiently to cause the company’s credit metrics to deteriorate to below levels we view as commensurate with the rating. The ratings could also come under pressure over the near to medium term, due to operating factors--for example, lower volumes and selling prices--if not sufficiently offset by lower input costs.
We view ratings upside as limited at this stage, even if the company’s credit measures were to improve from their current levels, given our view of its aggressive financial policy.
Related Criteria And Research
All articles listed below are available on Ratings Direct on the Global Credit Portal.
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Forest Products Industry, Dec. 11, 2009
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers’ Speculative-Grade Debt, Aug. 10, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008