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I AGREE
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
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Please see the ratings disclosure page on our website www.moodys.com
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Please see the Credit Policy page on Moodys.com for the methodologies
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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
An der Welle 5
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SUBSCRIBERS: 44 20 7772 5454
Moody's upgrades Lecta to B1, stable outlook
No Related Data.
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