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.
