(The following statement was released by the rating agency)
Feb 20 - Fitch Ratings has affirmed Sappi Southern Africa (Pty) Ltd’s (Sappi SA) National Long-term rating and senior unsecured ratings at ‘A+(zaf)'.The National Short-term rating has been affirmed at F1(zaf)'. The Outlook on the National Long-term rating is Stable.
The affirmations reflect the stable financial profile of the group and its leading global market position in dissolving wood pulp. While Fitch expects FFO adjusted net leverage (net leverage) to materially increase to 2.3x at end-September 2013 from 1.2x at end-September 2012, due to substantial planned capital expenditure in 2013, net leverage is expected to improve to less than 2x in 2014 as the company’s net debt position and cash generation improves following the ramp-up in dissolving wood pulp production in 2013. New capacity is expected to reach full production from late-2013 onwards and generate adequate cash to support moderate medium-term deleveraging.
Sappi SA’s business profile compares favourably with other international pulp & paper companies and is supported by its dominant and competitive position in packaging paper in the southern African market and as the world’s top producer of dissolving wood pulp. This segment enjoys higher profitability and lower cyclicality than the broader paper & pulp sector notably because of its use in varied and defensive end-markets such as textiles, pharmaceuticals and food industries..
However, the ratings are constrained by the group’s limited global scale and diversification, supply price risk and foreign exchange moves. The pulp & paper industry’s intrinsic weaknesses, including secular decline and overcapacity, are other weaknesses.
Sappi’s liquidity profile is solid, with cash balances of ZAR1.2bn; unutilised banking facilities of ZAR823m and adequate access to the domestic capital markets through its ZAR5bn Domestic Medium-Term Note programme, allowing the company to service short-term operational and maturity obligations (notably a ZAR1,0bn bond maturing in FY2013, expected to be refinanced).
Fitch has applied its parent and subsidiary rating methodology to Sappi SA and its 100%- owner Sappi Limited. Although we deem Sappi Ltd’s credit profile weaker than Sappi SA‘s, we believe that risks of cash leakage from Sappi SA are limited. However, any change, actual or expected, in the relationship between Sappi SA and its shareholder could lead to a rating action.
Positive: Given a lack of diversification and scale amongst its peer group, an upgrade is unlikely in the foreseeable future.
Negative: Future developments that could lead to negative rating action include:
- A sustained rise in FFO adjusted gross leverage above 2.0x.
- EBITDA margins sustained below 12%.
- Sustained negative FCF , limiting the groups’ ability to deleverage.
- A deterioration in the “ring-fenced” nature of Sappi SA with its parent company Sappi Limited leading to a change in methodology approach could be negative for Sappi SA.