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Rating Action:

Moody's changes Ilim Timber's outlook to stable; affirms B2 ratings

27 Nov 2020

London, 27 November 2020 -- Moody's Investors Service ("Moody's") has today changed Ilim Timber Continental S.A.'s (Ilim Timber) outlook to stable from negative. At the same time, Moody's affirmed the B2 corporate family rating (CFR) and the B2-PD probability of default rating.

RATINGS RATIONALE

Today's rating action reflects Moody's expectation that Ilim Timber's operating performance and credit metrics will improve materially in 2020 because of very strong industry conditions. Although the market environment is likely to moderate in 2021, the company should sustain its improved credit quality thanks to its adherence to a balanced financial policy, positive free cash flow (FCF) generation, and focus on gradual debt reduction.

Demand for sawn timber has been relatively resilient across key regions this year despite the pandemic while prices significantly increased in the second half of 2020 from a low in 2019. This together with a decrease in the cost of logs in Germany due to a temporary oversupply should result in Ilim Timber's strong operating performance. Its revenue is likely to remain flat in 2020 but EBITDA almost to double to €65 million-€70 million from €36 million in 2019 with EBITDA margin expanding to 12%-14% from 7% over the same period. However, because the highly favourable market conditions will fade off over the next 12 months, EBITDA is likely to decrease to a more sustainable level of €50 million-€60 million in 2021.

Moody's expects Ilim Timber's leverage, measured as Moody's-adjusted debt/EBITDA, to decrease below 3.0x by the end of 2020 from 5.8x in 2019 due to a significant rise in EBITDA and then to level off at 3.0x-3.5x in 2021 on the back of some contraction in earnings which will be balanced by continuing debt repayment. The company may reduce its gross debt to $175 million-€185 million by year-end 2020 and to €150 million-€165 million by year-end 2021 from €206 million as of 31 December 2019. Ilim Timber should generate positive FCF (after shareholder distributions) of €15 million-€20 million a year in 2020-21 thanks to moderate working capital needs and modest maintenance capital spending.

The company pursues a prudent financial policy. It prioritises deleveraging over expansion and large shareholder distributions and targets net leverage of 2.0x-2.5x on a reported basis.

Ilim Timber's rating factors in (1) the company's geographic diversification of assets, with two mills in Germany and the other two in Eastern Siberia, Russia; (2) the proximity of the company's production assets to reliable and accessible raw material supply and an established distribution infrastructure; (3) its diversified customer base and established sales channels to all key regions; (4) the well-invested modern saw mills in Germany that require low-maintenance capital spending; (5) the improving financial discipline and focus on debt reduction; (6) the company's healthy liquidity; and (7) its comfortable debt maturity profile of €21million a year on average in 2021-22, before a balloon repayment of around €135 million in November 2023.

The rating also takes into account (1) Ilim Timber's low product portfolio diversification because around 74% of the company's sales are represented by sawn timber, a market characterised by seasonality and volatility in terms of volumes and prices; (2) its fairly small size on a global scale, reflected in its revenue of €496 million for the 12 months ended 30 June 2020; (3) high operational concentration at Wismar mill in Germany; (4) somewhat volatile spreads between cost of logs and sawn timber prices, resulting in volatile profitability; (5) the fragile global economic environment and uncertainty about the recovery path; and (6) the company's partial exposure to an emerging market's (Russia) operating environment.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

Ilim Timber's rating incorporates corporate governance considerations, in particular its highly concentrated ownership, which creates the risk of rapid changes in the company's strategy and development plans, revisions in its financial policy and an increase in shareholder payouts or related-party transactions that could be detrimental to the company's credit strength. This risk is partially mitigated by covenants and dividend payment rules under the syndicated debt facility signed in November 2018. Ilim Timber's track record over the last four years also demonstrates adherence to prudent financial policies and consistent strategy.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Ilim Timber's comfortable positioning within the B2 rating category and Moody's expectation that in the next 12-18 months the company will (1) maintain its Moody's-adjusted debt/EBITDA below 4.0x; (2) continue to generate positive FCF; and (3) maintain at least adequate liquidity.

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

Moody's does not anticipate a positive pressure on the rating to build up over the next 12-18 months. In a longer term Moody's could consider the rating upgrade if the company was to (1) maintain a strong balance sheet with Moody's-adjusted debt/EBITDA below 3.5x and EBITDA interest coverage above 3.5x on a sustainable basis including during market troughs, (2) maintain strong liquidity, and (3) pursue a conservative financial policy and generate positive post-dividend FCF on a sustainable basis. A rating upgrade would also require good visibility into the company's ability to manage short- and mid-term debt maturities and continued access to funding.

Moody's could downgrade Ilim Timber's rating if its (1) Moody's-adjusted debt/EBITDA was to rise above 5.0x on a sustained basis; (2) operating performance, cash generation or market position were to weaken materially; or (3) liquidity was to deteriorate.

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.

Switzerland-domiciled Ilim Timber is one of the largest softwood sawn timber producers in Europe. The company operates two facilities in Germany and two in Russia, with a total annual production capacity of 2.6 million cubic meters of sawn timber and 0.2 million cubic meters of plywood. For the 12 months ended 30 June 2020, Ilim Timber reported revenue of €496 million, of which 74% was derived from sawn timber, 15% from by-products and 11% from plywood segment, and Moody's-adjusted EBITDA of €38 million. The company generates 71% of its revenue from operations in Germany and 29% from its mills in Russia. Ilim Timber is controlled by the Russian businessmen, Boris and Mikhail Zingarevich.

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.

Mikhail Shipilov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
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Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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No Related Data.
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