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Rating Action:

Moody's upgrades Lecta to B1, stable outlook

07 Apr 2011

Approximately EUR 743 million of rated debt affected

Frankfurt am Main, April 07, 2011 -- Moody's Investors Service today upgraded the Corporate Family Rating ("CFR") and Probability of Default Rating of Lecta S.A. ("Lecta") to B1 from B2. Concurrently, Moody's upgraded the rating for the EUR598 million senior secured floating rate notes due 2014 to B1 from B2 and the rating for the EUR150 million senior unsecured floating rate notes due 2014 to B3 from Caa1. The outlook on the ratings remains stable.

RATINGS RATIONALE

"The upgrade of the CFR to B1 reflects the relatively robust operating performance and cash generation demonstrated by Lecta during the recent challenging quarters. Despite a significant contraction in demand for coated fine paper in 2009 and high input costs which impacted producers in 2010, Lecta was able to gradually enhance profitability on 2009 levels on the back of strong pricing execution and prudent cost management with credit metrics now positioning the company solidly in the B1 category", says Anke Rindermann, Moody's lead analyst for the European paper industry. As 2011 unfolds, higher average prices compared to 2010, in addition to a further gradual demand increase should help producers to mitigate the effect of still elevated input costs. At the same time, however, Moody's cautions that the industry remains exposed to the secular demand decline trend for paper that continues unabated and requires producers to further implement capacity rationalizations to avoid a rebuild of pricing power.

As a result of Lecta's robust performance and solid cash flow generation, credit metrics could be improved towards the requirements for the B1 rating category as indicated by RCF/Debt above 10% per September 2010. Moody's in particular recognizes that Lecta generated a substantial amount of free cash flow over the last two years despite considerable payouts for restructuring measures, which allowed the company to build up a sizeable cash position of €271 million as of September 2010. While Moody's would expect some of the working capital releases to be reversed as volumes continue to recover, Lecta's liquidity position should remain solid, reflecting our expectation of continued positive free cash flow generation, access to the currently unused €60 million revolving credit facility without conditionality language and no debt maturities before 2014. Nevertheless, the group's leverage as defined by Moody's adjusted Debt/EBITDA of 6.2x (net debt/EBITDA, as adjusted by Moody's, of 4.3x) remains elevated for a company operating in a commoditized and cyclical industry.

The stable outlook mirrors our expectation of Lecta to at least sustain current profitability levels and a continuation of positive free cash flow generation, which should yield a further gradual deleveraging in net debt terms. In addition, the stable outlook does not consider any sizeable cash distribution towards shareholders, which however to our understanding is reasonably restricted by the bond documentation.

More fundamentally, the B1 rating positively takes into account Lecta's (i) leading market position in its core south European markets of coated fine paper, (ii) the favourable product mix in higher-margin coated fine and specialty paper grades, as well as (iii) the proximity to customers, which allows production and shipping flexibly and lowers transportation costs, in addition to overall lean overhead functions.

At the same time, the rating remains constrained by (i) Lecta's highly leveraged capital structure in particular in light of the inherent cyclicality of the paper industry as well as the company's low vertical integration, (ii) the fact that it is owned by a private equity fund imposing the risk that the currently achieved capital structure will not be sustainable, (iii) its small absolute scale as evidenced in a revenue base of around EUR1.5 billion as per LTM September 2010, and its regional concentration and segmental focus on coated fine paper.

Further upwards pressure would require a track record of improved profitability levels as indicated by EBITDA margins in the low to mid teens, enabling in turn a further deleverage of Debt/EBITDA moving to below 4.5 times while we would also expect a continuation of positive free cash flow generation.

The rating could come under downward pressure should Lecta's profitability decline as indicated by EBITDA margins materially below 10% (as per September 2010: 9.7%), cash coverage as measured by RCF / Debt to below 10% (as per September 2010: 12.9%) or free cash flow generation turning negative

Downgrades:

..Issuer: Lecta S.A.

....Senior Secured Regular Bond/Debenture, Downgraded to LGD3, 48% from LGD3, 47%

Upgrades:

..Issuer: Lecta S.A.

.... Probability of Default Rating, Upgraded to B1 from B2

.... Corporate Family Rating, Upgraded to B1 from B2

....Senior Secured Regular Bond/Debenture, Upgraded to B1 from B2

....Senior Unsecured Regular Bond/Debenture, Upgraded to B3, LGD5, 76% from Caa1, LGD5, 77%

....Senior Unsecured Regular Bond/Debenture, Upgraded to B3, LGD5, 76% from Caa1, LGD5, 77%

The principal methodologies used in this rating were Global Paper and Forest Products Industry published in September 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Lecta, with legal headquarters in Luxembourg, is a leading coated fine paper manufacturer in Spain, Italy and France. The company also has a specialty paper division and a distribution business in Spain, Portugal, France and Argentina. Lecta reported sales of around EUR1.5 billion for the last twelve months ending September 2010. Lecta is controlled by private equity fund CVC.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Frankfurt am Main
Anke Rindermann
Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt am Main
Matthias Hellstern
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
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Moody's upgrades Lecta to B1, stable outlook
No Related Data.
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