Sappi Papier Holding GmbH -- Moody's affirms Sappi's Ba2 rating, outlook changed to stable

Rating Action: Moody's affirms Sappi's Ba2 rating, outlook changed to stableGlobal Credit Research - 08 Dec 2021Frankfurt am Main, December 08, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Ba2 corporate family rating (CFR) of Sappi Limited (Sappi), as well as its Ba2-PD probability of default rating (PDR). Concurrently, the rating agency has affirmed the ratings of the instruments issued by Sappi's guaranteed subsidiary Sappi Papier Holding GmbH: its Ba2 ratings of the guaranteed senior unsecured notes (due 2026 and 2028) and its B1 rating of the guaranteed senior unsecured notes (due 2032). The outlook on Sappi and Sappi Papier Holding GmbH has been changed to stable from negative.A full list of affected ratings can be found at the end of this press release.The rating action was triggered by a material strengthening in Sappi's key credit metrics as per end of its fiscal year 2021 with Moody's adjusted EBITDA margin improving to 9.7% and Debt / EBITDA decreasing to 5.3x. Moody's expects further material improvement during 2022 on the back of a supporting market environment and the additional contribution from the expansion of its Saiccor mill. These improvements will bring credit metrics to levels more appropriate for the Ba2 rating.RATINGS RATIONALESappi's operating performance has materially improved during 2021 on the back of increasing Dissolving Pulp prices, from the trough experienced in 2020, combined with higher volumes on Packaging and Specialities segment. The currently favourable operating environment fuelling recovery in demand for coated woodfree paper is also expected to benefit its graphic paper segment as illustrated by high utilization rates that provide pricing power to paper producers and will lead to improving operating performance in the segment during 2022.In addition, operating performance will be positively affected by the start-up of incremental new production at its Saiccor mill, that started during calendar Q4 2021, and is expected to increase Sappi's DWP production by 110,000 tonnes. Furthermore, increasing textile fiber prices further support higher DWP prices. With regards to Sappi's paper and packaging portfolio, Moody's expects that increasing volumes and prices in both business segments will lead to higher revenue and stronger profitability during 2022. We remain cautious however that the current strong momentum for paper products may start to fade as we move through 2022, which may require additional closures and/or restructuring to protect pricing.Other supporting factors are management's focus on strengthening the group's balance sheet, visible also in the full dividend cut and Sappi's solid liquidity which will give Sappi the necessary capacity to finish projects that will meaningfully contribute to profit and cash flow generation.The Ba2 CFR of Sappi is primarily supported by its sizeable scale, with around $5.3 billion of sales in the fiscal year ended 30 September 2021 (fiscal 2021); leading market positions globally in the production of coated paper and dissolving wood pulp (DWP), and strengthened offering in speciality and packaging papers; solid geographical diversification, with operations across Europe, North America and South Africa (Ba2 negative); good degree of vertical integration into pulp and energy; and strategy to diversify into structurally growing businesses while maintaining a solid balance sheet, with a commitment to keep reported net debt/EBITDA (as defined by Sappi) below 2.0x, compared with 3.7x in fiscal 2021.The major constraint on Sappi's Ba2 CFR is its still-sizeable exposure to the graphic paper business, which is structurally declining in mature markets and requiring constant restructuring and capacity reductions. Sappi's DWP and speciality and packaging paper businesses serve markets with good underlying fundamental growth prospects, but they are to a large extent commodities, subject to fairly volatile market prices, which may lead to some degree of volatility in credit metrics. Moreover, Sappi needs to maintain its financial discipline in deleveraging towards its stated net leverage target, remaining focused on reducing debt and maximising cash generation in the context of its 2025 strategy.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSMoody's takes into account the impact of environmental, social and governance (ESG) factors when assessing companies' credit quality. Although the pulp and paper industry is a fairly large consumer of energy and water in production processes with occasional environmental incidents, we assess that it has moderate exposure to environmental risk.OUTLOOKThe stable outlook reflects the expectation that Sappi will be able to further improve its credit profile over the next 12-18 months so that its Moody's adjusted debt/EBITDA will improve towards 4.0x with Moody's adjusted RCF/debt remaining above 15% during its 2022 fiscal year. It is also supported by the group's solid liquidity position with material funds at hand of around USD1.1 billion from cash on balance sheet and undrawn credit lines.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's could upgrade Sappi's ratings if (1) RCF/debt remained at around 20% on a sustained basis; (2) EBITDA margins, as adjusted by Moody's, are sustained at around 15%; (3) Moody's-adjusted debt/EBITDA moving towards 3.0x.Moody's could downgrade the ratings, if Sappi's (1) EBITDA margin, as adjusted by Moody's, were to sustainably decline towards single-digit in percentage terms; (2) debt/EBITDA, as adjusted by Moody's, were to increase above 4.0x on a sustained basis; (3) RCF/debt, as adjusted by Moody's, were to sustainably decline towards mid-teens in percentage terms; (4) liquidity were to weaken.LIQUIDITYWe consider Sappi's liquidity to be good. As of the end of September 2021, Sappi reported cash and cash equivalents of around $366 million, with access to a total of around $730 million committed revolving credit facilities (RCFs), which were fully undrawn, in South Africa and Europe, including a E525 million RCF maturing in March 2023. While part of the group's non-South African bank debt, the securitization borrowings and the RCFs all contain financial covenants, the new covenant package provides sufficient headroom to Sappi.These sources, together with funds from operations, should comfortably cover Sappi's working capital needs and elevated capital investment requirements. As of the end of September 2021, Sappi reported $87 million in short-term maturities. The next material capital market debt maturity is the E450 million guaranteed senior unsecured notes in fiscal 2026. The securitization program matures in 2024 and is typically renewed every two years to maintain the long-term treatment, and its ability to do so in future is critical to maintain the Ba2 rating. LIST OF AFFECTED RATINGS: ..Issuer: Sappi Limited Affirmations: .... LT Corporate Family Rating, Affirmed Ba2.... Probability of Default Rating, Affirmed Ba2-PDOutlook Actions:....Outlook, Changed To Stable From Negative..Issuer: Sappi Papier Holding GmbHAffirmations:....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed B1....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Ba2Outlook Actions:....Outlook, Changed To Stable From NegativePRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Paper and Forest Products Industry published in October 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1105007. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in Johannesburg, South Africa, Sappi Limited (Sappi) is one of the leading global producers of coated fine paper and DWP, along with a growing product offering in speciality and packaging papers. In fiscal 2021, the group generated sales of around $5.3 billion across three segments based on regions: Europe (47% of revenue in fiscal 2021); North America (31%); and South Africa (22%). Sappi is listed on the Johannesburg Stock Exchange, with a broad distribution of ownership and a market capitalization of around ZAR24.9 billion as of 2 December 2021.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. 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