Stora Enso Oyj. Table Of Contents

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1 April 12, 2011 Stora Enso Oyj Primary Credit Analyst: Jacob Zachrison, Stockholm (46) ; Secondary Contact: Peter Kernan, London (44) ; Table Of Contents Major Rating Factors Rationale Outlook Business Description Business Risk Profile: Exposed To Highly Cyclical Forest Product Industry Financial Risk Profile: Relatively Weak Operating Cash Flow Generation Financial Statistics/Adjustments 1

2 Major Rating Factors Strengths: One of the world's largest forest products companies, with a diverse earnings base. Competitive cost position. Moderate debt leverage. Corporate Credit Rating BB/Positive/B Nordic National Scale Rating --/--/K-4 Weaknesses: Presence in cyclical and currently oversupplied paper markets. Exposure to the graphic paper segments, where demand is hampered by structural challenges. Weak profitability and cash generation, albeit currently improving. Rationale The ratings on Finland-based forest products group Stora Enso Oyj reflect its fair business risk and significant financial risk profiles. The fair business risk profile is based on the group's exposure to the highly competitive, commoditized, and cyclical forest product industry (especially graphic paper), and its relatively weak, albeit improving, profitability. These negative factors are balanced by strong positions in the relatively stable and less export-dependent packaging segments, significant pulp and energy integration including low-cost South American assets, and broad product and geographic diversification. The group's significant financial risk profile is based on its cyclical and generally weak operating cash flow generation (albeit currently improving), which is offset by a balanced capital structure with modest debt leverage, and strong liquidity. Key business and profitability developments Following a severe drop in demand for European forest products in 2009 and materially lower prices, including price decreases in newsprint and magazine paper at the beginning of 2010, market conditions in the industry gradually improved during A recovery in demand and increased pulp prices supported a gradual recovery in paper and board prices. As a result of improved market conditions and internal cost savings mitigating cost inflation, Stora Enso's operating performance improved materially in Sales increased by about 15% compared with 2009, and the adjusted EBITDA margin increased to 11.9% from 8.6% in Although we believe that the industry will remain cyclical, the near-term industry outlook is generally favorable, with average prices in many segments likely to be higher in 2011 than in This is especially valid for newsprint (accounting for about 12% of external group sales), where we understand that price increases in Europe of 15%-20% were agreed at the beginning of the year. In our opinion, there are good prospects that Stora Enso will be able to maintain its current operating performance over the near term. Standard & Poor s RatingsDirect on the Global Credit Portal April 12,

3 Key cash flow and capital-structure developments During 2008 and 2009 Stora Enso's cash flow debt-protection measures were below levels that we consider consistent with the ratings, as a result of weak market conditions and operating performance. Improved market conditions in 2010, translated, however, into significantly increased operating cash flows, with adjusted funds from operations increasing to 1.1 billion from 0.7 billion in Combined with low investment levels, with capital expenditures at 0.4 billion, credit measures improved significantly. Adjusted funds from operations to debt and adjusted debt to EBITDA were about 31% and 3.0x in 2010, compared with 18.5% and 4.9x respectively for full-year Current credit measures are strong in relation to our expectations for the ratings, i.e. adjusted funds from operations to debt of above 20% and adjusted debt to EBITDA of about 3.5x. In our opinion, there are good prospects that Stora Enso will maintain its current credit measures over the near term, reflecting the favorable near-term industry outlook. The group's financial position could, however, weaken if the group were significantly to increase spending levels, although our base case assumes modestly increased capital expenditure levels compared with For example, in January 2011, the group announced that it would build a new pulp mill in Uruguay through a joint venture company Montes del Plata (in which Stora Enso has a 50% share), and also that the group would build a new containerboard mill in Poland. Stora Enso's acquisition activity was low in 2010, and we expect continued low acquisition spending in the near term. Liquidity The short term rating is 'B'. In our view Stora Enso's overall liquidity is strong, as liquidity resources substantially exceed short-term cash uses, loan documentation is free from restrictive financial covenants, and the group has a solid relationship with its banks. This was evidenced in December 2010, when the group signed a new three-year committed credit facility of 700 million, with no financial covenants. The group's primary liquidity sources consist of: Cash and liquid assets of 1.1 billion at year-end 2010 (of which we consider about 0.9 billion to be excess cash); An undrawn committed revolving credit facility of 0.7 billion maturing in January 2014 (free of financial covenants that would restrict Stora Enso from drawing on the facility); and About 700 million (on Dec. 31, 2010) from various long-term sources, including Finnish pension fund loans. Funds from operations, which were 1.1 billion in These sources should be well in excess of the following near term outflows: Debt-maturities of about 0.7 billion in 2011, and about 0.3 billion in Working capital increases (which were about 0.3 billion in 2010) and capital expenditures (about 0.4 billion in 2010, but expected to be higher in 2011); and Dividend payments ( 158 million paid in 2010, proposed to be about 197 million in 2011). Recovery analysis The various unsecured debt issued by Stora Enso is rated 'BB', the same level as the corporate credit rating. The recovery rating is '3', indicating our expectation of meaningful (50%-70%) recovery in an event of payment default. Cover is at the low end of the range. 3

4 For the purpose of our analysis, we simulate a hypothetical payment default. In our hypothetical scenario, we believe that the group would face pressure on profitability resulting from over-supply, pressure on prices, and input cost volatility. The group's EBITDA margin at the simulated point of default is below 6%. Accordingly, we have extended the default year from 2013 to 2014 in line with the maturity of the new revolving credit facility. In our hypothetical scenario, we have valued the business using a going-concern approach supported by Stora Enso's leading market positions, modern and efficient asset base, broad product and geographic diversity, and significant vertical integration. The valuation at the point of hypothetical default results from a combination of discounted cash flow and market multiple approaches, taking into account historical valuations in the paper sector, and is based on stressed EBITDA of 515 million and a blended multiple of 6.2x EBITDA. At the hypothetical point of default, the stressed enterprise value amounts to about 3.2 billion and is reduced by priority obligations estimated at about 1.27 billion. These would comprise the enforcement costs as well as finance leases, mortgage loans, and structurally senior bank debt of subsidiaries. This would result in a residual enterprise value of about 1.9 billion for the holders of the 3.6 billion unsecured debt. The waterfall of payments would lead to recovery prospects for the unsecured debt in the 50%-70% range. We have assumed that the new 700 million revolving facility due 2014 would be fully drawn at default and would rank pari passu with existing unsecured debt. We have assumed that drawings under the pension loan at the time of default would be about 235 million, and that the loan would also rank pari passu with the rated notes due to its unsecured nature. In our view, if the pension loan drawings were to increase to the 800 million limit currently available, this would not materially impact the recovery ratings. However, in the event that such borrowings were secured by any of Stora Enso's assets, unsecured debt recoveries might be significantly lower. Outlook The positive outlook reflects Stora Enso's improved operating performance, cash flows, and credit measures, which if sustained could lead to a higher rating within the next year. This would be exemplified by a maintained adjusted EBITDA margin of at least 12%, adjusted funds from operations of 25%-30%, and adjusted debt to EBITDA of about 3x. The outlook could be revised to stable if operating performance and credit measures were to weaken from their current levels, with, for example, adjusted funds from operations to debt falling below 25%, and adjusted debt to EBITDA increasing to about 3.5x. This could be a result of a decline in industry conditions and price levels. It could also result from materially higher debt levels due to expansionary investments, although our base case assumes a modest increase in investment levels in Business Description With sales of 10.3 billion in 2010, Stora Enso is among the largest diversified forest product companies globally, with leading positions in newsprint, magazine paper, fine paper, and consumer and industrial packaging board. Operations also include specialty paper, pulp production--primarily used in the group's own mills--and wood supply and wood products. Standard & Poor s RatingsDirect on the Global Credit Portal April 12,

5 Table 1 Stora Enso Oyj Operating Statistics, Continuing Operations* (Mil. ) Sales Operating margin (%) Newsprint & bookpaper ,594.7 (0.9) Magazine paper , Fine paper , Consumer board , Industrial packaging , Wood products , (0.7) (4.5) *Excluding non-recurring items and fair valuations The group has production facilities in several countries, including Finland, Sweden, Germany, Belgium, Brazil, Russia, and China. Production and sales are focused on Europe, but North America and Asia are also important markets (see table 2). Table 2 Stora Enso Oyj Geographical Sales Breakdown - Continuing Operations (Mil. ) Europe 7, , ,848.1 US Latin America Asia Africa Other Total 10, , ,028.8 Stora Enso's strategy includes the following key points: New growth markets in emerging countries; Maintaining and developing its global leadership position in fiber-based packaging; Increased integration with plantation-based pulp; and Presence in selected paper grades. Stora Enso is domiciled in Finland, and is listed on the Helsinki and Stockholm stock exchanges. The Finnish state holds 25% of the voting rights, but no state support is factored into the ratings. Business Risk Profile: Exposed To Highly Cyclical Forest Product Industry The main weaknesses of the group's "fair" business risk profile, according to our classifications, are: Exposure to the highly cyclical forest product industry, characterized by demand fluctuations resulting from economic activity, recurring periods of over-capacity, and pricing pressure. A history of intense competition within the industry. Here the focus has been on market share and capacity utilization (due to high fixed costs), as well as market fragmentation. High sensitivity to the cost of raw materials, and limited pass-through of costs because of poor pricing power. 5

6 Export dependence in many segments and exposure to foreign exchange rate developments. A strengthening of the euro against the U.S. dollar makes Stora Enso and other European producers less cost competitive than their U.S.-based competitors; in addition, such a strengthening could lower European paper prices. Moderate barriers to entry, especially in many growth markets. This reflects a high degree of product commoditization, moderate production difficulties, and considerable cost advantages for producers with new equipment. These factors are balanced by a limited degree of product differentiation and benefits of scale. A still significant exposure to graphic paper (with newsprint, magazine, and fine paper representing almost 50% of sales in 2010). These are generally more cyclical than packaging or hygiene grades, and are challenged with structurally declining demand. Limited wood supply integration, with less than 10% of sourcing from own forestland (in Brazil, China and Uruguay). This is partly balanced by long-term supply agreements. These negative factors are partly offset by: Stora Enso's somewhat better-than-industry-average cost position. This reflects the large size and efficiency of its paper machines, major restructuring and cost savings initiatives over the past few years, fairly high energy integration, and high levels of pulp integration. Strong presence in the consumer and industrial packaging segments (about 30% of sales in 2010), which tend to show more resilience to cyclical downturns. Self-sufficiency in terms of pulp needs. This is mainly a result of low-cost plantation-based pulp in Latin America, which will grow further in next few years following the decision to build a new pulp mill in Uruguay. In addition, the group currently benefits from being a net seller of pulp as pulp prices increased significantly in Self-sufficiency in electricity and energy is high, in our view, at about 60% at a group level. The group owns a large amount of low-cost energy generation facilities (hydro, nuclear, and coal). A well-diversified asset and product portfolio. Although the main paper grades partly overlap, packaging and wood products partly follow a different demand pattern, which helps reduce earnings cyclicality, in our view. Strong and growing presence in emerging markets. This includes magazine and fine paper production in China, as well as pulp and magazine capacity in Latin America (supported by own forestland assets). Financial Risk Profile: Relatively Weak Operating Cash Flow Generation The main weaknesses of the group's "significant" financial risk profile, according to our classifications, are: Relatively weak operating cash flow generation over the past few years, reflecting weak market conditions. This put pressure on coverage ratios, although a recovery was seen in Significant volatility in free operating cash flow, reflecting working capital use and differences in capital expenditure levels. Capital expenditures are likely to increase in the next few years, reflecting growth investments in, for example, Latin America. This is balanced by the following supportive factors: Moderate debt leverage. Stora Enso's adjusted debt-to-capital ratio was 37% as of Dec. 31, 2010, and has been between 37% and 44% over the past five years. Ability and willingness to temporarily reduce capital expenditures and dividends to preserve cash. This was evidenced in 2009, when market conditions remained weak, and the company reduced capital expenditures to Standard & Poor s RatingsDirect on the Global Credit Portal April 12,

7 about 0.4 billion from 0.7 billion in 2008, and cut dividends by 55%. A strong liquidity position, in our view, with liquidity resources well in excess of the next two years' debt maturities. Financial Statistics/Adjustments In accordance with our criteria, we make several adjustments to Stora Enso's financial position (see table 3). Stora Enso has material interests in certain companies that are reported as associated companies and recorded under the equity method. These companies are primarily Bergvik Skog AB (not rated; 43% equity stake), Veracel Celulose S.A. (not rated; 50%), and Tornator Oy (not rated; 41%). The debts in Bergvik and Tornator are non-recourse to Stora Enso, and we make no debt adjustment. Stora Enso is exposed to Bergvik and Tornator through its ownership stakes and long-term supply contracts. The exposure to Bergvik and Tornator is mitigated by the favorable characteristics of the companies' asset bases; namely, forestland, which normally does not decrease in value over time. Stora Enso guarantees its share of Veracel's debt, and we include this liability in our analysis. Included in available-for-sale investments, Stora Enso reports its 14.8% stake in Finnish power generation company Pohjalan Voima Oy (PVO; not rated), which, in turn, indirectly owns 57% of a Finnish nuclear operator, Teollisuuden Voima Oy (TVO; not rated). Although this is a strategic asset for the group, we believe that the value of the PVO holding, given the current high energy price environment, more than balances Stora Enso's proportionate share in the liabilities of PVO. Our view could change, however, should energy prices fall significantly below the procurement costs for the PVO supplies. In the surplus cash adjustment to debt, we have excluded 250 million from the reported cash balances, reflecting our view of what we consider as cash tied up in the group's operations. Table 3 Reconciliation Of Stora Enso Oyj Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. )* Stora Enso Oyj reported amounts --Fiscal year ended Dec. 31, Operating income (before D&A) Operating income (before D&A) Operating income (after D&A) Cash flow from operations Shareholders' Interest Debt equity expense Reported 4, , , , , Standard & Poor's adjustments Operating leases (Note 31 Commitments and Contingencies p. 117, 5% discount rate applied) Postretirement benefit obligations (Note 22 Post-Employment Benefits p. 89) Guarantee to Veracel (Note 31, p. 117) Surplus cash and near cash investments (Note 24 Other Provisions - minimum cash requirements) (0.8) (860.9)

8 Table 3 Reconciliation Of Stora Enso Oyj Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. )* (cont.) Capitalized interest (Note 9, p. 67) Share-based compensation expense (Note 7, p. 62) Reclassification of nonoperating income (expenses) (Note 9, p. 64) Reclassification of working-capital cash flow changes (11.5) Minority interests Fair valuations, and other (Note 3, p. 51) Equity accounted investments result (Note 5,. 58) Change in value of biological assets (Note 5, p. 58) Restructuring costs excluding fixed asset impairment (Note 3, p. 51) Fixed assets and impairment charges (Note 12 p. 70) (59.2) (59.2) (59.2) (112.5) (112.5) (246.2) Total adjustments (382.2) 51.0 (85.5) (82.1) (220.1) Standard & Poor's adjusted amounts Debt Equity Operating income (before D&A) EBITDA EBIT Interest expense Cash flow from operations Adjusted 3, , , , *Please note that two reported amounts (operating income before D&A and cash flow from operations) are used to derive more than one Standard & Poor's-adjusted amount (operating income before D&A and EBITDA, and cash flow from operations and funds from operations, respectively). Consequently, the first section in some tables may feature duplicate descriptions and amounts. Table 4 Stora Enso Oyj -- Peer Comparison* Stora Enso Oyj UPM-Kymmene Corp. Mondi Group Rating as of April 12, 2011 BB/Positive/B BB/Stable/B BB+/Positive/-- --Average of past three fiscal years-- (Mil. ) Revenues 10, , ,943.3 EBITDA , Funds from operations (FFO) Capital expenditures Debt 3, , ,039.5 Equity 5, , ,932.1 Adjusted ratios EBITDA/revenues (%) Oper. income (bef. D&A)/revenues (%) EBITDA interest coverage (x) Standard & Poor s RatingsDirect on the Global Credit Portal April 12,

9 Table 4 Stora Enso Oyj -- Peer Comparison* (cont.) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Total debt/debt plus equity (%) *Fully adjusted (including postretirement obligations). Excess cash and investments netted against debt. Table 5 Stora Enso Oyj -- Financial Summary* --Fiscal year ended Dec Rating history BB/Positive/B BB/Negative/B BB+/Stable/B BBB-/Negative/A-3 BBB/Stable/A-2 (Mil. ) Revenues 10, , , , ,460.0 EBITDA 1, , ,702.4 Net income from continuing operations (879.7) (677.7) Funds from operations (FFO) 1, , ,239.0 Capital expenditures Debt 3, , , , ,965.3 Equity 6, , , , ,919.4 Debt and equity 9, , , , ,884.7 Adjusted ratios EBITDA/revenues (%) Oper. income (bef. D&A)/revenues (%) EBIT interest coverage (x) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) (1.3) Discretionary cash flow/debt (%) (9.2) (5.2) 9.4 Debt/EBITDA (x) Debt/debt and equity (%) *Fully adjusted (including postretirement obligations). Excess cash and investments netted against debt. Ratings Detail (As Of April 12, 2011)* Stora Enso Oyj Corporate Credit Rating Nordic National Scale Rating Commercial Paper Foreign Currency Nordic National Scale Rating K-4 Senior Unsecured (10 Issues) BB/Positive/B --/--/K-4 B BB 9

10 Ratings Detail (As Of April 12, 2011)*(cont.) Corporate Credit Ratings History 15-Dec May Apr Feb Nov Oct Jun-2007 BB/Positive/B BB/Negative/B BB+/Watch Neg/B BB+/Negative/B BB+/Stable/B 11-Nov-2008 Nordic National Scale Rating --/--/K-4 11-Nov-2008 Business Risk Profile Financial Risk Profile Debt Maturities (As of Dec. 31, 2010) 2011: 752 mil. 2012: 257 mil. 2013: 100 mil. 2014: 772 mil. 2015: 560 mil. Thereafter: 1,570 mil. Related Entities Stora Kopparbergs Bergslags AB Issuer Credit Rating BBB-/Negative/A-3 BBB/Negative/A-3 --/--/K-3 Fair Significant BB/Positive/B *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: Industrial Ratings Europe; CorporateFinanceEurope@standardandpoors.com Additional Contact: Industrial Ratings Europe; CorporateFinanceEurope@standardandpoors.com Standard & Poor s RatingsDirect on the Global Credit Portal April 12,

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