Rationale
The outlook revision reflects our view of the improvement in Mondi’s operating and financial
performance, cash flows, and credit metrics in 2011. It also reflects our view that Mondi’s
improved performance has provided the group with a cushion to withstand a potential weakening in
operating conditions in 2012, due to industry cyclicality, macroeconomic pressure, or input cost
inflation.
In our base-case credit scenario, we assume some weakening in the group’s operating
environment in 2012, as renewed macroeconomic constraints are likely to translate into a gradual
weakening of market conditions. Nevertheless, we believe that Mondi’s financial performance will
remain strong for the rating over the near to medium term. Specifically, we think that Mondi
could prove able to sustain Standard Poor’s-adjusted funds from operations (FFO) to debt of
more than 35% and adjusted debt to EBITDA of less than 2.5x even in a downside scenario. On Dec.
31, 2011, the group had adjusted debt of about EUR1.3 billion.
Despite cost inflation for key production inputs such as wood, recycled fiber, and energy,
Mondi’s EBITDA margin improved markedly in the financial year to Dec. 31, 2011. At that time,
Mondi’s adjusted EBITDA margin stood at about 16%, compared with about 14% for full-year 2010.
The improved operating performance, combined with the completion of a demerger of a South
African packaging subsidiary, contributed to improvements in the group’s credit measures,
including adjusted debt to EBITDA of 1.4x and adjusted FFO to debt of 61% in 2011, compared with
2.3x and 39% in 2010.
The rating on Mondi reflects our view of Mondi’s “satisfactory” business risk profile,
underpinned by its low cost position with a well-invested asset base, a leading position in
emerging markets, and meaningful geographic and end-market diversity. It also reflects the
group’s “strong” liquidity profile, supportive financial policies, and improved operating and
financial performance. These factors are balanced by medium-term risk factors, particularly
Mondi’s exposure to the competitive and cyclical paper and packaging markets.
We note the group’s commitment to manage dividends, investments, and acquisitions at levels
that do not put its investment-grade rating at risk. Accordingly, we take the view that Mondi
will seek to maintain its operating and financial performance, on a sustainable basis, at levels
we consider commensurate with an investment-grade rating, even in a scenario of economic
weakness in its main markets of Western and Eastern Europe, Russia, and South Africa.
Liquidity
Continued…
