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Rating Action:

Moody's affirms Sappi's Ba2 rating, outlook stable

30 May 2022

Frankfurt am Main, May 30, 2022 -- 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 remains stable.

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

The rating action recognises a material strengthening in Sappi's key credit metrics for the twelve months that ended in March 2022, ahead of Moodys expectation. Key credit metrics as of March 2022, including Moody's adjusted EBITDA margin improving to 13.4% and Moody's adjusted Debt / EBITDA decreasing to 3.0x, are solidly positioning Sappi at the Ba2 rating level. While Moody's expects further improvement during H2 2022 on the back of a supporting market environment and the contribution from the expansion of its Saiccor mill, we remain cautious that market conditions for paper products in Europe as well as pulp market fundamentals will likely normalize from 2023.

RATINGS RATIONALE

Sappi's operating performance has materially improved during H1 2022 on the back of a favorable pricing environment in all of its segments, particularly in graphic paper, combined with higher volumes. Paper volumes grew 16% on the back of short-term effects including recent capacity closures from competitors, ongoing logistical challenges, and a prolonged labour strike at UPM-Kymmene's (UPM, Baa1 Stable) Finnish paper mills. On the back of strong demand, paper prices surged and will support strong operating performance in the segment during H2 2022 before likely retreating from 2023.

Packaging and speciality papers sales volumes grew 19% y-o-y in H1 2022 , driven by robust global demand and renewed volume growth in Europe while successful selling price increases offset rising input costs. Dissolving pulp (DWP) segment maintained its strong momentum in H1 2022 fueled by robust demand and improved logistics conditions in South Africa combined with high DWP prices. The rating agency expects that operating environment will remain supportive during H2 2022 leading to solid revenue and profitability growth for Sappi. However, the rating agency also acknowledges the uncertainty posed by the implications from the currently ongoing military conflict in Ukraine and the lingering global inflationary pressure. Additionally, Moody's recognizes the fact that the currently strong operating performance has been achieved in a fairly benign pricing environment and current profitability levels are difficult to be sustained and expected to normalize downwards in the next 12-24 months.

Other supporting factors are: (i) Sappi's large scale and leading market positions in many of its businesses with increasing focus on growing its packaging and specialities business segment that demonstrates solid growth fundamentals; (ii) management's focus on strengthening the group's balance sheet, visible also in the full dividend cut and the announced intention to proceed to early debt repayments; and (iii) Sappi's solid liquidity profile which will provide 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 $6.4 billions of sales for the twelve months that ended in March 2022, 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 stable); 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 2x for the twelve months that ended in March 2022.

The major constraint on Sappi's Ba2 CFR is the significant volatility in results over the last few years, still-sizeable exposure to the graphic paper business, which is structurally declining in mature markets and requiring constant restructuring and capacity reductions and is also impacting pricing during times of oversupply. 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 has historically contributed to material volatility in its 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 CONSIDERATIONS

While noting moderately negative Environmental risks and neutral to low Governance risks Sappi's ESG Credit Impact Score is Highly negative (CIS-4), driven by the company's still sizeable exposure to graphic paper, a business which is in structural decline which leads to a highly negative scoring for Social risks.

OUTLOOK

The stable outlook reflects the expectation that Sappi will continue to benefit from strong market conditions across most of its businesses. This will leave credit metrics in a strong position for 2022, but we expect operating conditions to level off from late 2022. The stable outlook is also supported by the group's solid liquidity position with material funds at hand of around $1.1 billion from cash on balance sheet and undrawn credit lines.    

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

Moody'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.

LIQUIDITY

Sappi's liquidity is considered to be good. As of the end of March 2022, Sappi reported cash and cash equivalents of around $440 million, with access to a total of around $689 million committed revolving credit facilities (RCFs), which were fully undrawn, in South Africa and Europe, including a €515 million RCF maturing in 2027. 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 March 2022, Sappi reported $84 million in short-term maturities. The next material capital market debt maturity is the €450 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-PD

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Sappi Papier Holding GmbH

Affirmations:

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed B1

....BACKED Senior Unsecured Regular Bond/Debenture , Affirmed Ba2

Outlook Actions:

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Paper and Forest Products published in December 2021 and available at https://ratings.moodys.com/api/rmc-documents/360648. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered 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. For the twelve months that ended in March 2022, the group generated sales of around $6.4 billion across three segments based on regions: Europe (48% of revenue); North America (30%); and South Africa (22%). Sappi is listed on the Johannesburg Stock Exchange, with a broad distribution of ownership and a market capitalization of around ZAR32 billion as of  25 May 2022.

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/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. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Oliver Giani
Vice President - Senior 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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