Svenska Cellulosa Aktiebolaget SCA 'A-/A-2' Ratings Affirmed After Announcement Of Wausau Acquisition; Outlook Stable

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1 Research Update: Svenska Cellulosa Aktiebolaget SCA 'A-/A-2' Ratings Affirmed After Announcement Of Wausau Primary Credit Analyst: Gustav Liedgren, Stockholm (46) ; Secondary Contact: Karin Erlander, London (44) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List OCTOBER 13,

2 Research Update: Svenska Cellulosa Aktiebolaget SCA 'A-/A-2' Ratings Affirmed After Announcement Of Wausau Overview Svenska Cellulosa Aktiebolaget SCA has announced that it will acquire U.S.-based tissue producer Wausau Paper Corp. for $687 million, including outstanding interest-bearing debt. Although SCA will fund the acquisition with debt, we believe that its credit metrics will remain in line with our expectations for the rating. We therefore affirmed the 'A-/A-2' ratings on SCA and maintained the stable outlook. Rating Action On Oct. 13, 2015, Standard & Poor's Ratings Services affirmed its 'A-' long-term, 'A-2' short-term, and 'K-1' Nordic regional-scale corporate credit ratings on Sweden-based hygiene and forest products group Svenska Cellulosa Aktiebolaget SCA (SCA). The outlook remains stable. Rationale The affirmation follows the announcement from SCA that it has entered into an agreement to acquire U.S.-based tissue manufacturer Wausau Paper Corp. (B-/Positive/--) for $687 million (about 5.6 billion Swedish krona; SEK) including outstanding interest-bearing debt. SCA expects the transaction to close in the first quarter of Based in Mosinee, Wis., Wausau Paper's two mills produce tissue paper for sale to U.S. businesses rather than to consumers, which is also referred to as the away-from-home (AFH) market. In 2014, it had sales and EBITDA of about $352 million and $44 million, respectively. We believe this acquisition makes strategic sense for SCA, as it will improve the company's market position in the U.S., where it is the third-largest AFH tissue producer. We also recognize that SCA will be able to realize synergies amounting to $40 million per year when Wausau is fully integrated. Although SCA will use debt to fund the transaction, we believe that its credit metrics will remain in line with our expectations for the ratings, as its underlying operational cash flow should remain strong. Our base case assumes: Sales growth of 6%-7% in 2015 following tissue price increases in Europe OCTOBER 13,

3 and strong growth in emerging markets. Improved EBITDA margins due to cost-efficiency programs, price increases, and a weaker Swedish krona (benefitting the forest products division), which will offset recent raw material cost inflation. Capex of about SEK7.0 billion in 2015 and SEK8.4 billion in 2016 as the construction of a new pulp mill in Sweden begins. A slight increase in dividends throughout the forecast period. Based on these assumptions, we arrive at the following credit measures: Funds from operations to debt of about 40% in 2015 and 38%-40% in Debt to EBITDA of 2.0x-2.1x for Free operating cash flow to debt of about 15% for We continue to view SCA's business risk profile as firmly positioned within our "strong" business risk profile category, supported by the group's strong market positions, stable profitability, limited product substitution risk, and solid growth prospects compared with other companies with the same business risk profile. Our assessment reflects the group's leading market positions in tissue (consumer and AFH) and personal care products (primarily baby diapers as well as feminine hygiene and incontinence products). These products are characterized by stable end-user demand in mature markets and have very good growth prospects in emerging markets following recent acquisitions. SCA has strong market positions in most markets and is the clear market leader in tissue in Europe, following its acquisition of Georgia-Pacific's European tissue assets in These strengths are somewhat offset by the group's exposure to inherently volatile prices for raw materials, including pulp and recovered paper, as well as fierce competition in key markets. Compared with its nondurable consumer goods peers, another one of SCA's relative weaknesses is its exposure to more cyclical forest and paper products, currently accounting for about 15% of sales. In particular, the publication paper and sawn timber businesses are facing difficulties due to weak economic conditions in Europe and a structural decline in paper demand. Our view of SCA's financial risk profile as "intermediate" is supported by strong cash flow generation and a consistent financial policy, which has resulted in relatively healthy credit metrics through the cycle. The group has historically benefited from strong operating cash flows, which have sufficiently covered current and strategic capital expenditures and dividend payments. We consider SCA's extensive forestland holdings as an additional strength because these could be an alternative source of liquidity in a distressed situation. These strengths are somewhat offset by cyclical cash flow generation in the forest products segment, an acquisitive strategy to complement organic growth, and currency fluctuations. OCTOBER 13,

4 Liquidity We assess SCA's liquidity profile as "adequate" and expect liquidity sources to cover liquidity uses by at least 1.2x in the coming 12 months. We take into account SCA's relatively short maturity schedule, though it has improved since year-end 2014 due to the issuance of longer-dated bonds. We also view favorably the company's access to multiple funding sources and its well-established status in the bond markets. Principal liquidity sources: Cash and cash equivalents of SEK5.4 billion as of June 30, billion in unused long-term committed syndicated and credit facilities, with a 1 billion facility maturing in 2019 and a 1 billion facility maturing in The facilities carry no financial covenants or material adverse change clauses that would restrict SCA from drawing under them. Our forecast of unadjusted FFO of about SEK13.5 billion for 2015 and for that to increase in Principal liquidity uses: Short-term debt maturities of about SEK14.4 billion as of June 30, 2015, of which SEK1.5 billion relates to commercial paper, which we expect could be rolled over if needed. Debt maturities for months are about SEK10.4 billion. Capital expenditures of about SEK7.0 billion in 2015 and increasing in 2016 as the new pulp investment starts. Moderate working capital outflows. Dividends in 2016 of about SEK3.9 billion. Acquisition spending of about SEK7.0 billion. Outlook The stable outlook reflects our expectation of improving profitability in 2015 on the back of efficiency measures and modest price increases in tissue and personal care products. Furthermore, we expect SCA to maintain credit metrics near current levels, with Standard & Poor's adjusted funds from operations (FFO) to debt of at least 30% and debt to EBITDA below 3x (compared with 34.1% and 2.4x, respectively, for the 12 months ending June 30, 2015). Upside scenario An upgrade is unlikely over the next few years due to SCA's growth focus, which is likely to limit any pronounced improvement of its financial risk profile. However, we could consider a higher rating if the group's credit metrics improved significantly over an extended period, for example, FFO to debt of above 45% and debt to EBITDA of below 2x. OCTOBER 13,

5 Downside scenario We believe that downside risk to the rating is low unless there is a shift in SCA's financial policy that leads to increased financial leverage. This could be the result of a large debt-funded acquisition or unexpectedly large shareholder distributions, leading to FFO to debt markedly below our base case, with little likelihood of a swift return. We could also consider a negative rating action if SCA were to diverge materially from its established revenue and profitability trends, leading to a deteriorating business risk profile, though we believe the likelihood of such a scenario is remote at present. Ratings Score Snapshot Corporate Credit Rating: A-/Stable/A-2 Business risk: Strong Country risk: Low Industry risk: Low Competitive position: Strong Financial risk: Intermediate Cash flow/leverage: Intermediate Anchor: a- Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Adequate (no impact) Management and governance: Satisfactory (no impact) Related Criteria And Research Related criteria Key Credit Factors For The Branded Nondurables Industry, May 7, 2015 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Standard & Poor's National And Regional Scale Mapping Tables, Sept. 30, 2014 National And Regional Scale Credit Ratings, Sept. 22, 2014 Corporate Methodology, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Group Rating Methodology, Nov. 19, 2013 Methodology: Industry Risk, Nov. 19, 2013 Methodology: Management And Governance Credit Factors For Corporate OCTOBER 13,

6 Entities And Insurers, Nov. 13, Corporate Criteria: Rating Each Issue, April 15, 2008 Related research Industry Report Card: EMEA Forest And Paper Firms' Strategic Shift From Publication To Packaging Is Improving Profits, Sept. 23, 2015 Svenska Cellulosa Aktiebolaget SCA, April 20, 2015 Industry Report Card: Mixed Markets Offer Risks And Opportunities For European Consumer Goods Companies, June 24, 2015 Ratings List Ratings Affirmed Svenska Cellulosa Aktiebolaget SCA Corporate Credit Rating A-/Stable/A-2 Senior Unsecured A- Nordic Regional Scale K-1 Commercial Paper K-1 SCA Finans AB Senior Unsecured* A- Commercial Paper K-1 *Guaranteed by Svenska Cellulosa Aktiebolaget SCA. Additional Contact: Industrial Ratings Europe; Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) OCTOBER 13,

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