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Rating Action:

Moody's upgrades Ilim Timber's rating to B2; positive outlook

26 Nov 2018

London, 26 November 2018 -- Moody's Investors Service ("Moody's") has today upgraded to B2 from B3 the corporate family rating (CFR) and to B2-PD from B3-PD the probability of default rating (PDR) of Ilim Timber Continental S.A. (Ilim Timber), a leading softwood sawn timber producer domiciled in Switzerland with operating facilities in Russia and Germany. The outlook on these ratings is changed to positive from stable.

"We have upgraded Ilim Timber's ratings based on our expectation that the company will be able to sustain its reduced leverage, pursue a prudent financial policy, and maintain healthy liquidity and positive free cash flow," says Mikhail Shipilov, an Assistant Vice President -- Analyst at Moody's.

RATINGS RATIONALE

Today's upgrade of Ilim Timber's ratings reflects the company's improved leverage, completed refinancing of its debt, substantially improving maturity profile and reducing interest burden, and robust liquidity. The rating action also reflects Moody's expectation that the company will (1) pursue a balanced financial policy, with positive free cash flow generation; (2) continue to focus on gradual debt reduction over the next 12-18 months; and (3) will maintain its leverage below 4.0x.

Ilim Timber's leverage, measured as Moody's-adjusted debt/EBITDA, declined to 3.4x as of 30 June 2018 from 6.4x a year earlier, driven by the increase in the company's adjusted EBITDA by $28 million to $82 million on higher sawn timber prices and the $67 million debt reduction funded by proceeds from the sale of its 5.3% stake in Interfor, a Canadian lumber producer. However, because the highly favourable market conditions are fading off, EBITDA is likely to decrease to a more sustainable level of $70 million-$75 million over the next 12-18 months, curbing further material deleveraging.

In November 2018, Ilim Timber procured a five-year syndicated debt facility in the amount of €255 million (around $292 million) and utilised €223 million to refinance its outstanding bank debt. This refinancing resulted in a comfortable debt maturity profile, with a €150 million balloon repayment at maturity, almost halved interest expenses, and proved the company's adherence to prudent liquidity management. The new syndicated debt facility features a comprehensive covenant package and allows dividend payments if the company's reported net leverage is below 2.5x.

Ilim Timber's B2 rating also factors in (1) its 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) a diversified customer base; (4) the well-invested modern saw mills in Germany that require low-maintenance capital spending; (5) the healthy market conditions, supported by demand from the US, Europe and China; (6) the improving financial discipline and focus on deleveraging; and (7) the company's strong liquidity, with low principal repayments scheduled over the next two years, and moderate maintenance capital spending.

At the same time, the rating is constrained by (1) the company's low product portfolio diversification because around 72% 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 highly concentrated ownership, which creates the risk of rapid changes in the company's strategy, development plans and financial policies; (3) its fairly small size on a global scale, reflected in its revenue of $675 million for the 12 months ended 30 June 2018; (4) somewhat volatile spreads between cost of logs and sawn timber prices, resulting in volatile profitability; and (5) its partial exposure to an emerging market's (Russia) operating environment, with a less developed regulatory, political and legal framework.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook reflects the company's strong positioning within the current rating category and the possibility of an upgrade over the next 12-18 months based on Moody's expectation that the company will maintain its improved leverage and healthy operating performance.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could upgrade the rating if the company was to (1) maintain its Moody's-adjusted debt/EBITDA below 3.75x and EBITDA interest coverage above 3.5x on a sustainable basis, (2) maintain strong liquidity, and (3) pursue a conservative financial policy and generate sustainable positive post-dividend free cash flow.

Moody's could downgrade the rating if Ilim Timber's (1) Moody's-adjusted debt/EBITDA was to rise above 4.5x 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. 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 2018, Ilim Timber reported a revenue of $675 million, of which 72% was derived from sawn timber, 16% from by-products and 12% from plywood segment, and Moody's-adjusted EBITDA of $82 million. The company generates 70% of its revenue from operations in Germany and 30% from its mills in Russia. Ilim Timber is controlled by the Russian businessmen, Boris and Mikhail Zingarevich.

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.

Mikhail Shipilov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
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United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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