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Rating Action:

Moody's affirms Stora Enso's Ba2 ratings with positive outlook

27 Nov 2017

Frankfurt am Main, November 27, 2017 -- Moody's Investors Service, ("Moody's") has today affirmed the Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of default rating (PDR), NP Commercial Paper rating, (P)NP Other Short Term Rating and Ba2 various unsecured bond ratings of Stora Enso Oyj (Stora Enso). Outlook remains positive. A complete list of affected ratings is included at the end of this press release.

"Today's affirmation reflects the fact that Stora Enso's acquisition of a direct holding into the Bergvik forest would not materially change our view on its ratings, although this would lead to increased leverage", says Martin Fujerik, lead analyst for Stora Enso.

RATINGS RATIONALE

Today's rating action follows Stora Enso's announcement regarding the restructuring of Bergvik Skog, which is a platform for wood supply to Stora Enso in Sweden. Bergvik Skog is currently owned to 49% by Stora Enso and the forest entity, which Stora Enso originally sold into the structure in 2004, is held in the subsidiary Bergvik Väst (BV). BV is 100% owned by Bergvik Skog. In a series of transactions Stora Enso, together with other key shareholders, intends to take control of BV and sell the remaining holdings in Bergvik Skog. The forest assets in BV will be divided and Stora Enso's share of BV will be held in a wholly owned subsidiary of Stora Enso, which will be fully consolidated. Stora Enso currently reports Bergvik Skog at equity.

Stora Enso estimates that the transaction would result in a cash out effect of EUR250--300 million and an increase in gross debt by approximately EUR800 million through the full consolidation of the direct holding. Based on estimates provided by the company, the rating agency calculates that Stora Enso's debt/EBITDA, as adjusted by Moody's, would deteriorate to 3.8x from 3.4x for 12 months to September 2017 period. Even though the deterioration is material Moody's still believes that Stora Enso will be able to deleverage towards or even below 3.5x over the next 12-18 months. Hence, the increased leverage in conjunction with the transaction will not materially change the agency's view on Stora Enso's Ba2 ratings that continue to be strongly positioned, as indicated with positive outlook.

The deleveraging will come primarily from Stora Enso's continuing transformation beyond declining paper activities towards growth activities. In the past couple of years Stora Enso has invested sizeable amounts into these businesses well in excess of depreciation and maintenance capex levels. Some of those investments, such as the mills in Varkaus (Finland) and Beihai (China), have not yet reached their full potential. This provides further upside for EBITDA generation through 2018, protecting the company against headwinds in its Biomaterials division from potentially lower average pulp prices driven by a material increase in supply in pulp markets. In addition to that, Moody's expects that Stora Enso will continue to generate meaningful free cash flows in 2018, as capex further declines towards depreciation levels, which could be used for debt repayments.

Notwithstanding the increased leverage, the transaction has also a sound strategic rationale. First, acquiring a direct holding into Bergvik forest will secure supply of high quality wood with estimated value of EUR3.5 billion, which is a key input for Stora Enso, in an environment where new potential takers of the fibre sources enter the market. In addition, the forests are conveniently located in proximity of Stora Enso's Swedish mills, thus helping Stora Enso to optimise wood transportation costs, which are material, given that wood does not travel well.

Second, securing direct access to wood supply is crucial for Stora Enso to remain less susceptible to the volatility of wood prices, which helps to maintain higher stability and visibility over margins and cash flows. Lastly, the direct ownership will make it possible for Stora Enso to right-size the harvesting volumes in the asset and will also give the company direct access to some high value properties in prime locations in Sweden that are not key from a wood supply perspective and could be divested. This could provide a potential source for cash flows in the future, which could be used for deleveraging.

WHAT COULD CHANGE THE RATING UP/ DOWN

Positive pressure on Stora Enso's ratings could result from (1) further reduction of Stora Enso's dependence on the mature magazine and fine paper markets; and (2) a continued track record of a sustainable and balanced financial policy maintaining financial metrics commensurate with a Ba1 rating. This would include EBITDA margins towards mid-teen percentages translating into retained cash flow/debt towards 20%.

Moody's could consider downgrading Stora Enso if the group's profitability were to come under pressure, resulting in its debt/EBITDA ratio rising towards 4.5x, below 10% EBITDA-margins, below 15% retained cash flow/debt and consecutive periods of negative free cash flow generation. Moreover, negative ratings pressure could develop if Stora Enso were to engage in larger transactions and fail to return to a debt/EBITDA ratio comfortably below 4.5x in the medium term.

Headquartered in Helsinki, Finland, Stora Enso is among the world's largest paper and forest products companies with sales of approximately EUR10 billion in 2016. Its portfolio comprises production of paper, paper-based packaging, wood products and biomaterials. Stora Enso's shares are listed on the NASDAQ QMX Helsinki and Stockholm. Its single-largest shareholder with 12.3% of shares is Solidium Oy (unrated), which is 100% owned by the Finnish state, followed by Foundation Asset Management (unrated) with a holding of 10.2% shares. Stora Enso employs workforce of roughly 26,000 employees worldwide, with the majority of revenues generated in Europe.

LIST OF AFFECTED RATINGS

Issuer: Stora Enso Oyj

..Affirmations:

....LT Corporate Family Rating (Foreign Currency) , affirmed Ba2

....Probability of Default Rating, affirmed Ba2-PD

....Commercial Paper, affirmed NP

....Senior Unsecured Medium-Term Note Program, affirmed (P)Ba2

....Other Short Term, affirmed (P)NP

....Senior Unsecured Bonds, affirmed Ba2 (LGD4)

..Outlook Action:

....Outlook remains Positive

The principal methodology used in these ratings was Global Paper and Forest Products Industry published in October 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Martin Fujerik
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

Matthias Hellstern
MD - Corporate Finance
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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