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Rating Action:

Moody's upgrades M-real Oyi to B3; outlook changed to positive

01 Sep 2010

Approximately EUR500 million of rated debt affected

Frankfurt am Main, September 01, 2010 -- Moody's Investors Service has today upgraded the corporate family rating (CFR), the probability of default rating (PDR), the unsecured notes rating of M-real Oyi ("M-real" or "the company") to B3 from Caa1 and the senior unsecured medium-term note (MTN) programme rating to (P)B3 from (P)Caa1. Moreover, the rating of the senior unsecured guaranteed MTN programme of its majority-owned subsidiary Metsa Group Financial Services Oyi is upgraded to (P)B3 from (P)Caa1. The rating outlook has been changed to positive.

RATINGS RATIONALE

The upgrade of M-real's ratings reflects continuing improvements in the company's profitability and cash-flow generation, benefitting in particular from positive market developments in terms of pricing and delivery volumes in its principal business lines. As a result credit metrics have improved, including a return of retained cash flow-to-debt to 3.9% in the last twelve months ending June 2010 from negative levels recorded in 2009, which now meets the rating agency's requirements for the lower end of the single-B rating category. Moody's anticipates that M-real preserves its improved liquidity cushion and will proactively address upcoming debt maturities.

The positive outlook reflects the likelihood that M-real's future performance and credit metrics could be further strengthened by measures implemented by the company and provided that the recovery in market conditions is sustainable.

Further upward rating pressure could develop over the next 6 to 12 months if the company proactively addresses its refinancing challenges and continues to record improving financial metrics, reflected in positive free cash flows, an RCF-to-debt ratio rising towards high single-digit percentages and its debt-to-EBITDA ratio improving towards 5.5x.

However, the rating could come under negative pressure if debt-to-EBITDA exceeds 7x, if RCF-to-debt falls back towards 2.5% or if negative free cash flow generation weakens its liquidity position. Another factor that could add negative pressure on the ratings would be the inability to timely refinance any upcoming debt maturities.

M-real's pulp and energy business area continues to benefit from recent pulp price inflation. The operating performances of M-real's consumer packaging, office paper and specialty paper business areas are currently benefitting from a recovery in deliveries and gradually rising product prices, which it needs to offset a rise in input costs. While consumer packaging continues to be the most significant profitability contributor, a continued turnaround of the office paper and specialty paper business areas is needed to elevate M-real's operating performance and cash generation, before further positive rating pressure builds up.

Additional price increases have been announced, which, together with ongoing realisation of cost structure adjustments, should support a further improvement in the company's performance and cash generation. However, Moody's warns that the current recovery of paper and packaging markets in Europe is to some extent a result of restocking activities and that a sustainable recovery in demand is required to preserve the recently improved supply-demand balances in the industry, as a basis for a sustainable rebuild of pricing power.

Provided that the company continues to generate a break-even free cash flow generation and following its recent asset disposals, M-real's liquidity profile is currently sufficient to cover debt maturities until 2012. As at end-Q2 2010, M-real had access to EUR366 million of cash, interest-bearing receivables (almost fully from other Metsäliitto companies) of EUR126 million and undrawn pension loans of EUR144 million. These sources are sufficient to address debt maturities of EUR96 million and EUR160 million in 2011 and 2012, respectively. However, the company relies on external refinancing sources to partially cover the EUR500 million bond maturing in 2013. Moody's expects that M-real will address upcoming debt maturities on a timely basis.

Upgrades:

..Issuer: M-real Oyj

....Probability of Default Rating, Upgraded to B3 from Caa1

....Corporate Family Rating, Upgraded to B3 from Caa1

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)B3, LGD4, 52% from (P)Caa1, LGD4, 56%

....Senior Unsecured Regular Bond/Debenture, Upgraded to B3, LGD4, 52% from Caa1, LGD4, 56%

..Issuer: Metsa Group Financial Services Oy

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)B3, LGD4, 52% from (P)Caa1, LGD4, 56%

Outlook Actions:

..Issuer: M-real Oyj

....Outlook, Changed To Positive From Stable

..Issuer: Metsa Group Financial Services Oy

....Outlook, Changed To Positive From Stable

The most recent rating action was on 24 February 2010, when Moody's changed the outlook on the ratings to stable from negative.

The principal methodology used in rating M-real was "Global Paper and Forest Products Methodology", published in September 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

M-real, with headquarters in Espoo, Finland, is among Europe's largest integrated paper and forest products companies with sales of EUR2.4 billion per the last 12 months ending 31 December 2009. Core activities include consumer packaging, office papers and specialty papers.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public 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 Investors Service adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from reliable sources; however, Moody's Investors Service does not and cannot in every instance independently verify, audit 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
Christian Hendker, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany

Moody's upgrades M-real Oyi to B3; outlook changed to positive
No Related Data.
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