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Rating Action:

Moody's affirms SKG's Ba1 rating; outlook remains stable

25 Sep 2020

Frankfurt am Main, September 25, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the Ba1 corporate family rating (CFR) of Europe's leading manufacturer of paper-based packaging, Smurfit Kappa Group plc (SKG). Concurrently, the rating agency has affirmed the issuer's probability of default rating at Ba1-PD and the instrument ratings of the senior notes issued by SKG's subsidiaries at Ba1. The outlook on the ratings is stable.

"Today's rating action reflects the company's good track record of maintaining appropriate credit metrics for the existing rating and its sustainably positive free cash flow generation. While the outbreak of global pandemic creates a challenging macroeconomic environment, we are confident that SKG is able to continue maintaining strong credit metrics commensurate with the Ba1 rating", says Vitali Morgovski, a Moody's Assistant Vice President -- Analyst and lead analyst for SKG.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

SKG's rating is supported by the group's large scale, regionally diversified business profile with a leading market position in paper-based packaging. While SKG's product portfolio is more concentrated compared with some of its investment grade rated peers, with sustainable, 100% recyclable paper-packaging solutions it is focused on a structurally growing part of the forest products industry. The company continues to innovate and to increase the penetration of corrugated packaging solutions by substituting plastic-based packaging.

However, the paper-packaging industry is cyclical and competitive with little room for differentiation. It is also subject to volatile input costs and selling prices, partly due to overcapacity. This is mitigated by SKG's vertically integrated business model with a large manufacturing footprint with mills and plants to produce a full line of containerboard that is converted into corrugated containers. The company's vertical integration reduces its exposure to the volatility in containerboard prices and secures supply during periods of market fluctuations.

SKG's profitability has been on an improving trend over the past decade and its Moody's adjusted EBITDA margin averaged around the mid-teens in percentage terms since 2010. The margin reached 17.8% in 2019 in a fairly benign operating environment. But also in H1 '20, when the macroeconomic environment became extremely challenged by the outbreak of the global pandemic and the subsequent lockdowns implemented across many countries worldwide, SKG's profitability deteriorated by merely 50 basis points to 17.3%. Moody's expects that the company will be able to keep its profitability around the mid-teens level in a more difficult operating environment in the coming 12-18 months partly due the strength of its integrated business profile, but also because around 70% of its sales are generated from non-cyclical fast-moving consumer goods end-markets (food and beverage in particular) with a growing exposure to e-commerce and consumer awareness for sustainable packaging.

The outbreak of the global pandemic in H1 '20 had only a minor impact on SKG's key credit metrics. Its Moody's adjusted gross leverage was 3.2x at the end of June '20 (2.9x in 2019) compared to 3x-4x range Moody's views as appropriate for the current rating whereas retained cash flow to debt (RCF/debt) ratio was 23% (22% in 2019), above the 15%-20% guidance range for the Ba1 rating. On a net leverage basis the ratio of 2.8x remained unchanged over the first half-year 2020 as SKG prudently accumulated cash from its strong free cash flow (FCF) generation and its decision to postpone dividends distribution. However, the dividend payment of €193 million in September this year will reduce FCF for the full year 2020 and also lead to some softening in RCF/ debt ratio by the year-end. Nevertheless, Moody's expects that SKG will continue to build on its strong track record of sustainably positive FCF generation, including the 2008-09 global economic downturn, also in the coming 12-18 months.

SKG's financial policy follows a balanced approach towards investments, acquisitions and shareholder distributions while preserving the company's publicly stated net leverage target range of 1.75x -- 2.5x (2.1x at H1 '20 and year-end 2019), which Moody's views as largely commensurate with a crossover type of rating.

RATIONALE FOR STABLE OUTLOOK

The stable rating outlook reflects Moody's expectation that SKG will continue operating with Moody's-adjusted EBITDA margin around the mid-teens in percentage terms and generating sustainably positive free cash flow. Moreover, Moody's expects SKG to balance shareholder distributions and future acquisitions with its own stated net leverage targets.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Positive rating pressure could arise if:

• Moody's adjusted gross leverage were to decline below 3.0x on a sustained basis;

• Moody's adjusted retained cash flow/ net debt ratio were to improve above 20% on a sustained basis;

Conversely, negative rating pressure could arise if:

• Moody's adjusted gross leverage were to increase above 4.0x on a sustained basis;

• Moody's adjusted retained cash flow/ net debt ratio were to decline below 15% on a sustained basis;

• Failure to generate positive FCF due to weak operating performance or a material increase in shareholder distribution

LIQUIDITY

We consider SKG's liquidity to be good. At the end of June 2020, SKG reported €646 million of cash and cash equivalents, which were further supplemented by €1.1 billion available under its committed facilities, including €931 million under its revolving credit facility (RCF) and €156 million in committed securitisation facilities.

In addition, we expect internally generated cash flow to largely cover SKG's dividends and capital spending needs over the next 12-18 months. SKG's debt maturity is generally well spread, with around €174 million of short-term debt as of Q2 2020.

ESG CONSIDERATIONS

Despite the fact that the paper and paper-packaging industry is a fairly large consumer of energy and water in the production processes, with occasional environmental incidents, we score it as "moderate risk" in our environmental heat map. This score means that we believe the industry's exposure to environmental risk is broadly manageable, or it could be material to credit quality in the medium to long term (five or more years).

SKG is among the leaders in the environmental sustainability transition in Europe with a vision that is harmonised with the UN's 2030 Agenda and Paris Climate Accord. By year-end 2018, SKG reduced fossil CO2 emissions per produced tonne of paper by 29%, compared with the target of 40% set for 2030 in comparison with the 2005 baseline. In the field of forest management, 88% of packaging sold in 2018 was sourced from certified forests, while the continuous target is 90%. The company has also managed to reduce chemical oxygen demand from its paper mills by 33%, aiming at a 60% reduction by 2025 in the water discharged per produced tonne of paper from the 2005 base level by returning clean water from production back to nature. With regard to waste management, SKG has reduced waste sent to landfill from its paper mills by 7.3% since 2013 against its target of 30% by 2025.

Social considerations for SKG are predominantly related to safety, employee development and inclusion. Specifically, the company hosts health and safety days across all countries and plants with a continuous focus on reducing lost time accidents, along with providing ongoing training that promotes a safe and respectful work environment.

Corporate governance at SKG is centred around a well-established governance structure, which is state of the art for a publicly listed company of its size and consists of an audit committee, a compensation committee and a nominations committee, supplemented by a series of codes of conducts and policies covering a number of areas relating to operational and managerial practices. SKG's governance also balances its financial policies of low leverage and strong liquidity while continuing to appropriately invest in its business.

LIST OF AFFECTED RATINGS:

..Issuer: Smurfit Kappa Acquisitions

Affirmations:

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Smurfit Kappa Group plc

Affirmations:

.... LT Corporate Family Rating, Affirmed Ba1

.... Probability of Default Rating, Affirmed Ba1-PD

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Smurfit Kappa Treasury Funding Limited

Affirmations:

....BACKED Senior Secured Regular Bond/Debenture, Affirmed Ba1

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Smurfit Kappa Treasury Unlimited Company

Affirmations:

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

Outlook Actions:

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The 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 PROFILE

Headquartered in Dublin, Ireland, Smurfit Kappa Group plc (Smurfit) is Europe's leading manufacturer of containerboard and corrugated containers as well as specialty packaging, such as bag-in-box packaging of liquids like water or wine. The group operates in 23 European countries and 12 countries in the Americas. In the 12 months ended June 2020, SKG generated €8.6 billion in revenue. The group employs around 46 thousand people and has a primary listing on the London Stock Exchange and a secondary listing on the Irish Stock Exchange with a market capitalization of around €7.5 billion currently.

REGULATORY DISCLOSURES

For 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vitali Morgovski, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke Rindermann
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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