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Rating Action:

Moody's changes outlook to negative from stable for Norske Skog, Sappi, Stora Enso, UPM on the back of an ongoing difficult operating environment of the paper and forest products industry in the EMEA region

17 Apr 2007
Moody's changes outlook to negative from stable for Norske Skog, Sappi, Stora Enso, UPM on the back of an ongoing difficult operating environment of the paper and forest products industry in the EMEA region

Frankfurt, April 17, 2007 -- Moody's Investors Service today changed the outlooks to negative from stable on all the ratings for Norske Skogindustrier ASA (Ba1 Corporate Family Rating -- "CFR"), Sappi Ltd. (Ba1 CFR), Stora Enso Oyj (Baa3 senior unsecured domestic and foreign currency debt ratings, P-3 short term) and UPM-Kymmene (Baa2 senior unsecured domestic and foreign currency debt ratings) and their rated subsidiaries. At the same time, the ratings of Lecta S.A., (Ba3 CFR), M-real Oyj (B3 CFR) and Smurfit Kappa Group plc (Ba3 CFR) and their respective stable outlook were left unchanged.

"European manufacturers remain exposed to a precarious industry environment hampered by overcapacities and subsequent pressure on prices. Against earlier expectations of a more broad-based and sizable price recovery which is key to strengthened credit profiles that have weakened since 2001, recent price data on most paper grades suggests that marginal demand growth and capacity reductions have so far failed to have the required sufficiently positive impact on prices and therefore on the companies' performance" said Martin Kohlhase, Moody's lead analyst for the paper and forest products industry in the EMEA region. "Without such a price recovery, the financial profiles of Norske Skog, Sappi, Stora Enso and UPM remain weakly positioned within their respective rating categories. Although we have seen some improvements in 2006 and expect this positive trend to continue by and large in 2007 as a result of the currently strong economic environment and the companies' restructuring measures, the overall low margin levels and high debt loads leave little headroom to cushion against any downside pressure, be it from stagnating or weakening demand, increased international competition or further increases in raw material costs," he explained the rating agency's decision to change the outlook on the four European-based paper manufacturers to negative from stable.

Moody's said that as the European paper and forest product industry remained exposed to cyclical swings resulting from supply and demand imbalances, its ratings should reflect a sustainable credit profile throughout such a period of volatility: Ratings should be supported by a financial profile that are characterised by higher metrics than required for the respective rating category in times of strong demand development, which should then allow some temporary weakening of key credit metrics in a cyclical downturn. Moody's said that -- due to its concerns about a weaker than expected pricing environment and ongoing cost inflation that threatens to offset any restructuring-benefits -- all of the affected companies may be challenged to sufficiently strengthen their key credit metrics in this extended benign economic period to levels which could then also sustain some temporary weakening again.

Moody's remains concerned that the favourable demand growth for most paper grades over the past years has so far not resulted in sufficiently higher prices which would need to increase by at least 5-10% on a broad basis for a stabilisation of the ratings. While European newsprint price increases at 5% (contracts to a large part negotiated on an annual basis) came in at the lower end of expectations, Moody's has observed that magazine paper prices (SC and LWC) in major European markets exhibited a low single digit decline in the first quarter 2007 against the same period 2006 and against largely flat growth expectations. Although coated woodfree grades remained largely flat across Europe against an earlier 1% to 2% growth-expectation, uncoated fine paper exhibited significant growth rates year on year, without having a sufficient importance though for any of the affected companies to shield them against the weaker development of other grades.

Moody's has noted a more conservative stance towards reducing capital expenditures, freezing share buy-backs and cutting dividend payouts. While recognizing the positive impact of such measures, the rating agency cautions that a sustainable improvement of the companies' operating performance needs to result from better margins, whereas a positive impact from a further focus on these means is increasingly becoming more diminished and may, in the case of further reductions of investments in plant and equipment, erode future asset efficiency.

Moody's also noted that benefits from ongoing restructuring programmes beyond capacity closures, such as efficiency improvements, working capital management, supply chain management issues, are largely being offset by higher than anticipated cost inflation. Whereas energy prices have been a cost driver in the past and remain at historically high levels, a number of events (e.g. Russian export taxes to be imposed in July 2007, higher demand for the generation of alternative fuels, a mild winter) has increased demand for wood products and have led to increased wood prices. Furthermore, a growing demand for recovered paper from natural resource-poor China as well as spill-over effects from the overall higher wood costs may cause a further sharp increase in recovered paper prices well above some companies' expectations of single digit increases.

As to the further development of the ratings of Norske Skog, Sappi, Stora Enso and UPM Moody's said that in the case of a continuous positive performance trajectory and in the absence of any event-triggered rating action, it would assess to what extent improvements in the companies' financial profile would continue into 2008 and to what extent such improvements could provide a cushion for a possible weakening of the industry. This would generally require financial metrics at the upper end of or above the currently assigned ratings. Please refer to the credit opinions of Norske Skog, Sappi, Stora Enso and UPM for further details.

With respect to those rated issuers in the EMEA region which have not been affected by these outlook changes, Moody's commented that i) the Ba3 CFR with a stable outlook for Lecta had only been assigned on January 29, 2007, and the historically strong financial metrics give Lecta's overall credit profile some headroom before rating pressure builds up should the industry environment weaken; ii) M-real's ratings (CFR and unsecured debt instruments) have been lowered by one notch to B3 from B2 on March 9, 2007, with the outlook stabilised, reflecting weak financial metrics for fiscal year 2006 and already incorporating the weak pricing environment; iii) the CFR for Smurfit Kappa has been changed to Ba3 from B1 with a stable outlook on March 20, 2007, following the company's flotation on the stock exchange. Net proceeds of EUR 1.4 billion have entirely been applied for a sizeable debt reduction significantly improving credit metrics and aligning these with a Ba3 ratings level.

Norske Skogindustrier is among the world's leading producers of publication paper and is one of the most regionally diversified paper producers. The company, founded in 1962 with its headquarters in Lysaker in Norway, generated sales of NOK28.8 billion in 2006 and employed more than 8,000 people.

Sappi Ltd. is domiciled in Johannesburg, South Africa, and is a leading global producer of coated fine paper (Europe's number 1) and dissolving pulp with consolidated group sales at FYE 2006 (ending September) of USD 4.9 billion.

Stora Enso, with its legal domicile based in Helsinki/Finland, is the world's leading paper producer with sales of nearly EUR 14.6 billion in 2006 and a production capacity of 16.4 million tonnes of paper and board.

UPM, being headquartered in Helsinki, Finland, has a total printing and specialty paper-making capacity of 12.2 million tons per year, and with a global market share of about 20%, the company is the world's largest producer of magazine paper. In FY 2006 the company reported sales of EUR 10.0 billion.

Outlook Actions:

..Issuer: Norske Skogindustrier ASA

....Outlook, Changed To Negative From Stable

..Issuer: Sappi Limited

....Outlook, Changed To Negative From Stable

..Issuer: Sappi Papier Holding GmbH

....Outlook, Changed To Negative From Stable

..Issuer: Stora Enso Oyj

....Outlook, Changed To Negative From Stable

..Issuer: UPM-Kymmene

....Outlook, Changed To Negative From Stable

..Issuer: UPM-Kymmene Finance B.V.

....Outlook, Changed To Negative From Stable

Frankfurt
Johannes Wassenberg
Managing Director
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Martin Kohlhase
Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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