Stora Enso Oyj. Summary: Table Of Contents. Rationale. Outlook. Standard & Poor's Base-Case Scenario. Business Risk. Financial Risk.

Transcription

1 Summary: Stora Enso Oyj Primary Credit Analyst: Gustav Liedgren, Stockholm (46) ; Secondary Contact: Terence O Smiyan, London (44) ; terence.smiyan@standardandpoors.com Research Assistant: Akshat D Adukia, Mumbai Table Of Contents Rationale Outlook Standard & Poor's Base-Case Scenario Business Risk Financial Risk Liquidity Ratings Score Snapshot Recovery Analysis Related Criteria And Research SEPTEMBER 25,

2 Summary: Stora Enso Oyj Business Risk: FAIR Vulnerable Excellent CORPORATE CREDIT RATING Financial Risk: SIGNIFICANT bb bb bb BB/Stable/B Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Fair Exposure to the highly cyclical forest and paper products industry, characterized by intense competition, recurring periods of overcapacity, high sensitivity to raw material costs, and poor pricing power. Material exposure to graphic paper (newsprint, magazine, and fine paper represents around 36% of sales), which is facing a structural decline in demand. Still large exposure to mature and slow-growing European economies. Strong and improving position in the relatively attractive consumer packaging segment. Large and well-diversified asset and product portfolio. Financial Risk: Significant Cyclical operational cash flow generation. Highly capital-intensive operations and aggressive expansion investments. Ongoing dividend payments during period of high investments. Strong liquidity profile and balance maturity schedule. Ability and willingness to reduce capital expenditures to preserve cash. SEPTEMBER 25,

3 Outlook: Stable Standard & Poor's Ratings Services' stable outlook on Finnish forest and paper products group Stora Enso Oyj (Stora Enso) is stable. It reflects our view that Stora Enso's profitability will gradually improve, leading to broadly stable credit metrics. We forecast that Stora Enso's Standard & Poor's-adjusted ratio of funds from operations (FFO) to debt will be about 20% and adjusted debt to EBITDA less than 4x in both are levels we regard as commensurate with the 'BB' long-term rating. Upside scenario Although unlikely over the next 12 months, we could raise the long-term rating if we saw substantial and sustained improvements in Stora Enso's profitability and cash flow generation to the extent that we could revise our assessment of the group's business risk profile upward. While we think that credit metrics will remain around the current levels due to the group's investment ambitions, we could also raise the rating if FFO to debt rose to and remained above 30%. Downside scenario We could lower the long-term rating if weakening market conditions, combined with higher-than-expected investments, led to a deterioration of Stora Enso's credit metrics. For example, we would consider ratios of FFO to debt of about 15% and debt to EBITDA of more than 4x, for an extended period of time and with no scope for improvement, as incommensurate with the 'BB' long-term rating. Furthermore, we think the group's credit quality could weaken if its financial policy became more aggressive. This could occur as a result of large, debt-financed acquisitions or exceptionally shareholder-friendly measures, although we think these are currently unlikely. Standard & Poor's Base-Case Scenario SEPTEMBER 25,

4 Assumptions European economy picking up with GDP growth of 1.6% in 2015 and 1.9% in 2016 while Chinese economic growth moderating albeit still growing at 6.8% in 2015 and 6.6% in Flat revenue growth in 2015 as the paper segment continues to decline while pulp sales (through Montes del Plata) and consumer board exhibit growth. We expect sales growth to pick up in 2016 as the Guangxi paperboard mill comes online, but we forecast slightly lower pricing for paperboard in Europe due to temporary overcapacity. Profitability to improve in as new investments come online and poor performing paper assets are phased out. Capital expenditures of about 850 million- 900 million in 2015 and about 600 million in Flat dividends of about 240 million to be paid out in 2016 and 2017, and no large outlays on mergers and acquisitions. Key Metrics 2014a 2015e 2016e Sales growth (%) (3.3) EBITDA margin* (%) FFO/Debt* (%) Debt/EBITDA* (x) Note: All figures are fully Standard & Poor's adjusted. a--actual. e--estimate. Business Risk: Fair Our assessment of Stora Enso's business risk profile reflects the group's exposure to the highly cyclical European pulp and paper markets, characterized by demand fluctuations resulting from economic activity, recurring periods of overcapacity, high sensitivity to the cost of raw materials, and limited pass-through of costs because of poor pricing power. Stora Enso is also materially exposed to graphic paper (about 36% of group sales and approximately 6% of operational EBIT for the first six months in 2015), which is cyclical and in structural decline due to ongoing migration to electronic media. The fragmented market structure and recurring problem with overcapacity in Europe makes sustained price increases difficult to implement, in our view. In addition, we consider Stora Enso's large proportion of sales to low-growth European markets (about 75% in 2014) a further constraint. These weaknesses are mitigated by Stora Enso's strong positions within the more stable paper packaging materials market, and its large size and scope as one of the world's largest forest and paper products companies, with a well-diversified asset and product portfolio. A further relative strength is management's clear strategy to improve the business portfolio through investments in markets and product segments with attractive growth opportunities, such as consumer packaging in China and plantation-based pulp in South America, which should lead to an improved product mix with about 30% of sales coming from paper once the investments have been ramped up. Although we acknowledge that there are substantial implementation risks with the investments Stora Enso is currently undertaking, we think that its business risk profile could improve in the next two to three years if investments are realized as planned, strengthening profitability from the current levels. We also think that further cost-cutting and a selective SEPTEMBER 25,

5 investment policy in the mature segments is necessary to preserve cash flow generation. Financial Risk: Significant Stora Enso's financial risk profile is constrained by its highly cyclical cash flow generation, stemming from industry cycles and working capital use, and by its highly capital-intensive operations, with long lead times for new investments. The group is currently pursuing an aggressive investment plan to reposition itself toward growth segments within the forest products sector. Its Montes del Plata pulp mill in Uruguay commenced operations in 2014, while its packaging mill in Guangxi, China is due to come online in So we believe that Stora Enso's credit metrics could improve from 2016, given the increased earnings and cash flow generation potential of the group's current investment programs. However, delays or cost overruns relating to the investment programs, coupled with worsening operating conditions in the existing divisions, could put additional pressure on the credit metrics, and, in turn, on the ratings. In addition, we think that an improvement in credit metrics could be held back if the group decided to go ahead with a pulp mill investment in China. We understand a decision could be made toward the end of These weaknesses are offset by a willingness to reduce capital expenditures to support credit metrics, as was done in 2013 when the group decided to post-pone the construction of a pulp mill in China and only go ahead with the paperboard mill. We believe that the group's prefunding of investments, diverse funding base, and prudent liquidity management further mitigate its relatively high debt leverage and at times weak cash flow generation. Liquidity: Strong We assess Stora Enso's liquidity as "strong," as defined in our criteria. We expect the group's sources of liquidity to substantially exceed the uses over the months started July 1, Furthermore, the group's loan documentation is free from restrictive financial covenants; it has a solid relationship with its banks; and it has demonstrated access to the debt capital markets. Principal Liquidity Sources An available cash balance of about 987 million as of June 30, 2015; Access to an undrawn committed revolving credit facility of 700 million, maturing in January 2018 (free of financial covenants that would restrict Stora Enso from drawing on the facility), and $275 million available under its $460 million funding facility for the Guangxi investment; Our forecast of annual FFO of 1.1 billion- 1.2 billion in 2015 and 2106; and Proceeds from the issuance of bonds in August 2015 totaling 150 million. Principal Liquidity Uses Contractual debt maturities of about 1 billion over the next twelve months from June 30, 2015, although we understand a large part of it has already been repaid during the third quarter of 2015; Capital expenditures of about 850 million- 900 million in 2015 and about 600 million in Estimated annuals dividends of about 240 million; and Limited working capital and acquisition outflows. SEPTEMBER 25,

6 Ratings Score Snapshot Corporate Credit Rating BB/Stable/B Business risk: Fair Country risk: Low Industry risk: Moderately high Competitive position: Fair Financial risk: Significant Cash flow/leverage: Significant Anchor: bb Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Strong (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Neutral (no impact) Stand-alone credit profile : bb Recovery Analysis Key Analytical Factors The recovery rating on Stora Enso's senior unsecured debt is '4' and the unsecured debt is rated 'BB', at the same level as the corporate credit rating. The recovery ratings are limited by the substantial priority liabilities in the waterfall, the unsecured nature of the notes and the volume of pari-passu unsecured debt. In our hypothetical scenario, we believe that a sudden decline, rather than gradual, would lead the company to default by 2019, following very fast market price movements and lower demand, resulting in a deteriorated financial performance and liquidity crunch. Our issue and recovery ratings on the unsecured debt are supported by our valuation of the group as a going-concern basis, driven by its leading market positions, diversified asset base, broad product and geographic diversity, and significant vertical integration, as well as by the favorable insolvency regime in Finland. SEPTEMBER 25,

7 Simulated Default Assumptions Year of default: 2019 EBITDA at default: about 534 million Implied enterprise value multiple: 6.0x Jurisdiction: Finland Simplified Waterfall Gross enterprise value at default: about 3,206 million Priority liabilities (administrative costs and priority claims): 1,070 million Net value available to creditors: 2,135.6 million Secured debt claims[1]: about 874 million Unsecured debt claims[2]: 3,648 million Recovery expectation: 30%-50% (lower half of the range) [1] All debt amounts include six months of prepetition interest. [2] All debt amounts include six months of prepetition interest. RCF assumed 85% drawn at default. Related Criteria And Research Related Criteria Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Revised Revolver Usage Assumptions For Recovery Analysis In Corporate Ratings, Nov. 20, 2014 Key Credit Factors For The Forest And Paper Products Industry, Feb. 12, 2014 Corporate Methodology, Nov. 19, 2013 Methodology: Industry Risk, Nov. 19, 2013 Group Rating Methodology, Nov. 19, 2013 Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' Speculative-Grade Debt, Aug. 10, 2009 Update: Jurisdiction-Specific Adjustments To Recovery And Issue Ratings, June 20, 2008 Related Research Industry Report Card: EMEA Forest And Paper Firms' Strategic Shift From Publication To Packaging Is Improving Profits, Sept. 23, SEPTEMBER 25,

8 Business And Financial Risk Matrix Financial Risk Profile Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b- Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com SEPTEMBER 25,

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