(The following statement was released by the rating agency)
Nov 15 -
Summary analysis -- Holmen AB ------------------------------------- 15-Nov-2012
CREDIT RATING: BBB/Stable/A-2 Country: Sweden
Primary SIC: Forest products
Mult. CUSIP6: 436299
Credit Rating History:
Local currency Foreign currency
15-Dec-2010 BBB/A-2 BBB/A-2
17-Feb-2010 BBB/A-3 BBB/A-3
09-Dec-2009 BBB/A-2 BBB/A-2
The ratings on Sweden-based forest products group Holmen AB reflect Standard & Poor’s Ratings Services’ view of the group’s “satisfactory” business risk profile and “intermediate” financial risk profile, according to our criteria.
Holmen’s business risk profile is supported by its strong position in the relatively stable virgin fiber-based paperboard market, good integration, and better cost position than the industry average. We assess the group’s profitability as robust, with an average Standard & Poor‘s-adjusted EBITDA margin of about 16% over the past five years. We view the group’s large forestland holdings and hydropower assets as additional supportive strategic factors which support profitability and bring underlying stability to the group’s operations. Relative weaknesses are the group’s exposure to cyclical and structurally challenged publication paper markets and volatile input costs, as well as its limited geographic diversity.
Our assessment of Holmen’s financial risk profile takes into account our view of the group’s low debt leverage and a stable majority shareholder in L E Lundbergforetagen AB (A+/Stable/A-1). In addition, our base-case assumes that the group’s credit metrics will be sustained at their current levels. We continue to perceive Holmen’s financial policies as conservative.
S&P base-case operating scenario
Holmen’s profitability remains in line with our expectations, despite a difficult market environment. In the 12 months ended Sept. 30, 2012, revenues declined 3% year-on-year and the EBITDA margin declined to 14.6% from 15.7% in the previous corresponding period. The main reason for the decline was difficult operating conditions in the paper, forest, and timber segments, which faced low demand and slightly lower sales prices. While demand for publication paper is structurally challenged, demand for timber is currently exposed to a number of difficulties including weak construction industry conditions in Europe and a strong Swedish krona. Conversely, the group’s less cyclical paperboard operations and energy assets contributed with relatively stable performances. Holmen recently announced and implemented several measures to strengthen profitability, including energy efficiency projects at its Workington and Iggesund paperboard mills, workforce reductions at the Iggesund mill and the closure of a paper machine at a mill site in Hallsta. We consider these measures as credit positive for Holmen as they indicate that management is pro-active in tackling the current difficult market conditions.
In our base-case operating scenario, we anticipate that Holmen’s reported revenue will be slightly lower in 2012 compared with 2011 on the back of slightly lower sales volumes in the paper and paper board segments. This is likely to be offset by higher sales in the timber segment as a result of increased output by the group’s Braviken mill. We expect fairly stable prices for newsprint, magazine papers, and paper board in the remainder of 2012 and a possible slight increase 2013, if additional capacity closures in the market materialize. We expect Holmen’s EBITDA margin to remain at 15%-16% in the near to medium term, as difficult operating conditions in the paper and timber markets will likely be balanced by energy efficiency investments and other cost reductions. In our view this will translate into adjusted annual EBITDA of Swedish krona (SEK) 2.8 billion-SEK3.0 billion in 2012 and 2013.
S&P base-case cash flow and capital-structure scenario
A slightly weaker operating performance in the first nine months of 2012 in combination with high investment levels has resulted in declining credit metrics. As of Sept. 30, 2012, the group’s adjusted funds from operations (FFO) to debt was 28.4% and adjusted debt to EBITDA was 2.6x compared with 37% and 2.14x in the previous corresponding period. Capital spending is likely to amount to about SEK2 billion in 2012 as a result of energy efficiency projects in Workington and Iggesund. In 2013 and subsequent years, in line with management guidance, we expect a return to lower levels of capital spending of about SEK 1.2 billion annually. As a result, we think that the group’s credit metrics will improve over the near to medium term, with the ratio of FFO to debt in the 30%-35% range.
We expect Holmen’s capital structure to remain strong, partly owing to an increase in the value of the group’s forestlands. We do not forecast any material acquisitions or adverse changes in the group’s financial policy but we anticipate that dividend payments could progressively increase to levels achieved prior to the financial crisis of 2008-2009, in line with earnings.
The short-term rating is ‘A-2’. Under our criteria, we assess the group’s liquidity position as ‘adequate’, reflecting committed credit facilities that adequately cover short-term maturities.
We estimate that liquidity sources as of Sept. 30, 2012, exceeded liquidity needs by more than 1.2x over the next 12-24 months.
Holmen’s liquidity position on Sept. 30, 2012 was supported by:
-- Available cash on balance sheet of SEK189 million, although we do not view this amount as surplus cash. We consider a cash position of SEK200 million as necessary for ongoing operations.
-- Unused long-term committed credit facilities totalling about SEK5.3 billion, maturing in January 2016 (EUR400 million), December 2016 (SEK1.3 billion), and June 2017 (SEK570 million). In addition, we understand the company had access to a committed credit line of SEK2 billion maturing in September 2013, although we do not include this in our liquidity calculation due to its maturity within 12 months.
-- FFO in excess of SEK2.1 billion.
This compares with short-term debt of SEK3.6 billion as of Sept. 30, 2012, including about SEK3.3 billion drawn under a Swedish commercial paper program, maintenance capital spending of about SEK600 million and anticipated dividends of about SEK750 million. We believe the group’s committed credit facilities will sufficiently back up any refinancing of commercial paper, if necessary. The company will also face the repayment of a SEK1.4 billion bond in November 2013. The long-term credit facilities contain no material adverse change clauses, but are subject to a financial covenant. We expect Holmen to retain comfortable headroom under this covenant.
The stable outlook reflects our belief that Holmen can maintain its current operating performance over the near to medium term, despite weaker market conditions. It also reflects our belief that Holmen can continue generating adjusted FFO to debt of about 30%-35%, which we would consider commensurate with the current ratings.
We believe ratings downside could stem from deteriorating market conditions, for example, from a weakening economic environment which could lead to a rapid decline in demand, greater pressure on publication paper prices, and pressure on profitability in other divisions.
Given Holmen’s limited size and exposure to publication paper, we view upside potential as limited over the short term. Over the medium term, ratings upside could stem from an improved financial performance, in which FFO to debt averaged more than 40%, given our current assessment of Holmen’s business risk profile.
Related Criteria And Research
-- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For Corporate And Sovereign Issuers, May 15, 2012
-- 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
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008