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Rating Action:

Moody's affirms Sappi's Ba3 CFR, changes outlook to positive / provisional debt ratings assigned

Global Credit Research - 04 Apr 2011

Approximately USD2.3 billion of rated debt instruments affected.

Frankfurt am Main, April 04, 2011 -- Moody's Investors Service today affirmed the Ba3 Corporate Family Rating ("CFR") of Sappi Limited ("Sappi") and assigned a provisional (P)Ba2 rating to the proposed senior secured notes worth USD680 million to be issued by Sappi Papier Holding GmbH in two series due 2018 and 2021 respectively. The rating outlook has been changed to positive from stable.

The ratings on Sappi's existing senior secured and senior unsecured debt remain unchanged, though we expect minor changes to the respective LGD rates. The rating on the USD500 million global bond maturing in 2012 is expected to be withdrawn following repayment from the issuance proceeds. This rating action assumes a successful placement of the envisaged additional bonds which provides Sappi with an improved debt maturity profile and which Moody's has incorporated into its analysis.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavor to assign a definitive rating to the debt instruments. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

The affirmation of the Ba3 CFR reflects the considerable turnaround in Sappi's operating performance and credit metrics from the trough levels in 2009. We note that the recovery has in particular been driven by the group's South African and North American operations, which benefited from improved product pricing, higher demand levels and high pulp prices given the group's long position in pulp in these regions. Current credit metrics such as RCF/Net debt in the high teens and EBITDA margins around 12% position the company with some headroom in its current rating category.

The positive outlook is based on Moody's expectation that the rating could be upgraded over the next quarters should Sappi be able to sustain recent improvements in particular in its North American fine paper and South African forest and pulp operations as we might have reached peak conditions in these regions. With the European operations still lagging the recovery observed in the other divisions, the positive outlook also considers the potential for a clearly improved market balance following the announced restructuring measures. These measures could include the planned closure of 500,000 tonnes of fine paper capacity and by thus remove a large part of the structural overcapacity in the European market. The positive outlook also reflects the proactive approach in managing the group's debt maturity profile if implemented as announced.

Moody's notes however that despite the turnaround in Sappi's performance achieved so far, the company remains exposed to some structural challenges in the paper industry as the secular demand decline trend for paper continues unabated. In addition, elevated input costs, which potentially will rise further, remain a burden for profitability levels going forward, if companies are not able to pass these on to customers in a timely fashion. Also, we caution that there are costs related to the announced restructuring measures that will burden profitability in the short term before any benefits on the back of a tighter demand and supply balance will filter through.

The ratings could be upgraded over the next quarters should Sappi be able to sustain recent improvements in credit metrics through further improvements in particular in the European division, such as RCF/ debt above 15% and EBITDA margins above 12% as well as continued positive free cash flow generation.

Downward pressure would likely be exerted on the rating if Sappi's operating performance and cash flow generation were to deteriorate substantially, resulting in a weakening of existing credit metrics, such as EBITDA dropping to the single digit percentages, RCF/Debt falling towards the single digits, or EBITDA-Capex to interest expense below 1.0x.

The proceeds of the notes issuance will be used to repay the remaining portion of the USD500 million bond due in 2012, of which, following a tender offer earlier this year, USD350 million are still outstanding. The remainder will be applied towards a partial repayment of approximately EUR 200 million under the OeKB term loan facility and to cover transaction related fees and expenses. In addition, we note that Sappi has replaced the EUR209 million existing revolving credit facility, which was set to mature in 2012, with a new EUR350 million facility maturing in 2016.

The (P)Ba2 (LGD 3, 38%) rating assigned to the senior secured notes is one notch above the company's Ba3 CFR and reflects the relative seniority and security package of the new instruments in Sappi's capital structure. The proposed notes benefit from the same guarantee and security package as Sappi's existing senior secured debt, including the EUR300 million and USD350 million senior secured notes maturing 2014, the remaining portion of the OeKB term loan, the new revolving credit facility as well as certain other indebtedness.

These aforementioned instruments benefit from upstream guarantees on a senior basis of essentially all material operating subsidiaries of Sappi's international business, excluding South African operations. In addition, these instruments are partially secured as they benefit from a first-lien security interest in certain of Sappi's subsidiaries' property, plant and equipment, real estate and inventories, as well as share pledges on the stock of certain of Sappi's operating subsidiaries. Furthermore, the notes will benefit from a senior downstream guarantee provided by the ultimate holding company Sappi Ltd.

The ratings of the existing USD250 million global bond due 2032 issued by the holding company Sappi Papier Holding GmbH have been affirmed at B2. The instrument is rated two notches below the CFR reflecting the effective subordination relative to the considerable amount of senior secured debt ranking ahead in the capital structure with a closer proximity to operating cash flows and assets. The notes only benefit from a downstream guarantee by the ultimate holding company Sappi Ltd. on an unsecured basis.

Adjustments:

..Issuer: PE Paper Escrow GmbH

....Senior Secured Regular Bond/Debenture, Downgraded to LGD3, 38% from LGD2, 28%

....Senior Secured Regular Bond/Debenture, Downgraded to LGD3, 38% from LGD2, 28%

..Issuer: Sappi Papier Holding GmbH

....Senior Secured Bank Credit Facility, Downgraded to LGD3, 38% from LGD2, 28%

....Senior Unsecured Regular Bond/Debenture, Downgraded to LGD6, 94% from LGD6, 91%

Assignments:

..Issuer: Sappi Papier Holding GmbH

....Senior Secured Regular Bond/Debenture, Assigned (P)Ba2

....Senior Secured Regular Bond/Debenture, Assigned (P)Ba2

Outlook Actions:

..Issuer: PE Paper Escrow GmbH

....Outlook, Changed To Positive From Stable

..Issuer: Sappi Limited

....Outlook, Changed To Positive From Stable

..Issuer: Sappi Papier Holding GmbH

....Outlook, Changed To Positive From Stable

The principal methodologies used in this rating were Global Paper and Forest Products published in September 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Domiciled in Johannesburg, South Africa, and with group sales of USD6.8 billion during the last twelve months ending December 2010, Sappi Ltd. is among the leading global producers of coated fine paper and chemical cellulose.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Frankfurt am Main
Anke Rindermann
Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt am Main
Matthias Hellstern
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
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Moody's affirms Sappi's Ba3 CFR, changes outlook to positive / provisional debt ratings assigned
No Related Data.
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