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Rating Action:

Moody's changes outlook on Stora Enso to positive, affirms Ba2 CFR

04 Aug 2016

Frankfurt am Main, August 04, 2016 -- Moody's Investors Service has today changed to positive from stable the outlook on all the ratings of Helsinki-based Stora Enso Oyj (Stora Enso), one of the world's largest paper and forest products companies.

"Our decision to change the outlook on Stora Enso's ratings to positive factors in our view that the company can sustain and build on recent financial performance improvements. It also considers Stora Enso's strong liquidity profile and successful efforts to diversify its geographic and product line-up making it less dependent on the structurally declining paper market," says Matthias Volkmer, a Moody's Vice President -- Senior Credit Officer and lead analyst for Stora Enso.

Concurrently, the rating agency affirmed Stora Enso's Ba2 corporate family rating (CFR) and Ba2-PD probability of default rating (PDR), as well as the Ba2 ratings on its various senior unsecured debt instruments and the (P)Ba2 senior unsecured MTN program ratings.

A complete list of rating action is included at the end of this press release.

RATINGS RATIONALE

Today's outlook change to positive reflects Stora Enso's track record of financial performance improvements and its successful business model transition over the past few years from a pure paper and paper board producer to a more diversified global paper and forest company, all against the backdrop of challenging economic conditions and with significant financial investments. As these projects now come to fruition, we believe that execution risk is reducing and Stora Enso should return to sustainable positive free cash flow generation, which should then also help to bring down the still high debt levels.

It also factors in Moody's expectation that the company will sustain recent performance improvements, allowing the group to bolster its credit metrics and potentially move them in line with a higher rating over the next 12-18 months.

However, Moody's notes that Stora Enso's strategy of further diversifying its product mix from a traditional paper and board producer towards a growing renewable paper-packaging company may incorporate sizeable investments as well as potential M&A. That said, the rating agency understands that Stora Enso's management is committed to protecting its credit profile by maintaining an unadjusted net debt/operational EBITDA ratio of below 3x (2.3x as of LTM June 2016 compared to Moody's adjusted net debt/ EBITDA of 3.4x).

The Ba2 rating reflects Stora Enso's (1) strong market position among leading global producers of renewable fibre-based packaging solutions, biomaterials, wooden constructions and publication and fine papers; (2) overall size with annual sales of approximately EUR10 billion; (3) promising industry fundamentals with positive structural growth for fibre-based packaging products and wood products as well as its increased pulp business, where Stora Enso has built a significant long position, which will help support its new consumer board operations.

Moreover, Moody's positively notes that Stora Enso's deleveraging -- including substantial debt repayments of over 20% since 2012 -- has helped rebalance the interests of creditors and shareholders.

Another positive rating factor has been the gradual reduction of Stora Enso's dependence on the mature European and paper markets, where Stora Enso generated around 25% of its sales during LTM June 2016 yet only 20% of its EBITDA during LTM June 2016 (as reported).

Following the recent investment period, capex is expected to decrease towards depreciation levels in the coming years and Moody's expects that the group will benefit from the gradual ramp-up in new production capacity (Beihai and Varkaus) contributing to profitability and generating positive free cash flow, which will allow further deleveraging.

Today's outlook change also considers Stora Enso's strong liquidity profile with cash sources comprising cash on hand of approximately EUR519 million as at June 2016, internal cash flow generation with funds from operations for the next 12 months of around EUR1.15 billion. In addition the group has access to various long-term funding sources including an undrawn EUR700 million syndicated revolving credit facility which matures in January 2019.

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook reflects Moody's expectations that Stora Enso will be able to sustain its profitability through 2016 and onwards, allowing the group to maintain a through-the-cycle leverage of below 4.0x debt/EBITDA while management continues to pursue a balanced approach towards shareholders and creditors interest, in particular with regards to dividends, potential M&A activity and growth investments which should allow for sustainable positive free cash flow generation going forward.

WHAT COULD CHANGE THE RATING UP/ DOWN

Further positive pressure 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% and a return to free cash flow positive during 2016.

Although unlikely at this juncture, 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.

List of affected ratings:

Affirmations:

..Issuer: Stora Enso Oyj

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

....Corporate Family Rating, Affirmed Ba2

. Senior Unsecured Commercial Paper Program, Affirmed NP

.Senior Unsecured MTN Program, Affirmed (P)Ba2

.Senior Unsecured MTN Program, Affirmed (P)NP

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

.Senior Unsecured MTN Floating Rate Notes, Affirmed Ba2 (LGD4)

.Senior Unsecured MTN Fixed Rate Notes, Affirmed Ba2 (LGD4)

Outlook Actions:

..Issuer: Stora Enso Oyj

....Outlook, Changed To Positive From Stable

PRINCIPAL METHODOLOGY

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

Headquartered in Helsinki, Finland, and a worldwide work force of 26,000 employees, Stora Enso is among the world's largest paper and forest products companies, with sales of approximately EUR10 billion in the last 12 months ending June 2016. Core activities include publication and fine papers, paper packaging products and solid wood products. Stora Enso is also a net seller of pulp. 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 which is 100% owned by the Finnish state followed by Foundation Asset Management with a holding of 10.2% shares.

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.

Matthias Volkmer
VP - Senior Credit Officer
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

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

No Related Data.
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