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Rating Action:

Moody's upgrades Sappi to Ba1; stable outlook

25 Jan 2019

Frankfurt am Main, January 25, 2019 -- Moody's Investors Service ("Moody's") has today upgraded the corporate family rating (CFR) of Sappi Limited (Sappi) to Ba1 from Ba2, as well as its probability of default rating (PDR) to Ba1-PD from Ba2-PD. Concurrently, Moody's has also upgraded the ratings of instruments issued by Sappi's guaranteed subsidiary Sappi Papier Holding GmbH: its senior unsecured notes (due 2022 and 2023) and revolving credit facility to Ba1 from Ba2 and its senior unsecured notes (due 2032) to Ba3 from B1. Moody's has also changed the outlook on Sappi and Sappi Papier Holding GmbH to stable from positive. The complete list of the affected ratings is included in the end of the press release.

Today's upgrade recognises Sappi continuing to build a track record of maintaining financial discipline while undertaking projects to further strengthen and diversify its business profile beyond structurally declining coated paper", says Martin Fujerik, Moody's lead analyst for Sappi.

RATINGS RATIONALE

RATIONALE FOR THE UPGRADE TO Ba1

Today's action primarily recognises that Sappi has continued to maintain financial discipline over the past two to three years in undertaking growth projects to further strengthen and diversify its business profile, adhering to its self-imposed net leverage ceiling of 2.0x (2.1x for fiscal year end September 2018 (fiscal 2018), which only reflects seven months of EBITDA contribution from Cham Paper acquired in February 2018 for an equivalent of roughly USD140 million). In addition, this discipline was maintained in a fairly challenging operating environment characterised by a substantial inflation of hardwood and softwood pulp prices needed for paper production, which Sappi managed to offset through higher selling prices of paper. As a result, in fiscal 2018 Sappi continued to maintain credit metrics that Moody's views as well in line with a Ba1 rating, such as Moody's adjusted debt/EBITDA of 2.9x and Moody's adjusted retained cash flows (RCF)/debt of 23%.

The upgrade also recognises that owing to the investments into structurally growing dissolving wood pulp and specialty and packaging papers, Sappi's business profile continues to improve. In fiscal 2018, the proportion of EBITDA from coated paper reduced further to below 20% at group level and the rating agency expects that it will continue to decline. After years of deleveraging, Sappi significantly increased its investment pace in the past two fiscal years, investing as high as USD550 million in fiscal 2018, which is well above maintenance capital needs of around USD150 million. These investments will gradually bring EBITDA in the course of fiscal 2019 and fiscal 2020.

The company guides that it will spend up to USD600 million in fiscal 2019. While this amount is substantial, Moody's expects that the company will continue to exhibit financial discipline and will adjust its investment plan accordingly should the operating environment weaken or EBITDA and cash flow ramp-up from the already undertaken investments be slower than expected.

RATIONALE FOR A STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Sappi will continue to adhere to its net leverage ceiling and keep its Moody's adjusted debt/EBITDA around 3.0x and Moody's adjusted RCF/debt above 20%, even if global GDP growth slows down somewhat and coated paper demand continues to be weak, as seen in the last couple of months, when demand for coated paper declined year-on-year in the high single digits in % terms (vs. 3-4% on average over the past 10 years).

WHAT COULD CHANGE THE RATINGS UP/DOWN

An upgrade to Baa3, which is at this point unlikely, will primarily require further strengthening of Sappi's business profile including its diversification into growth segments, that should allow Sappi to deliver meaningful revenue and EBITDA growth without need to invest in a normal business environment. In addition, it will require further track record of financial policies that would lead to Moody's adjusted debt/EBITDA sustainably well below 3.0x and Moody's adjusted RCF/debt sustainably above 20%.

Moody's could downgrade the ratings, if Sappi's (1) EBITDA margin, as adjusted by Moody's, were to sustainably decline towards 10%; (2) debt/EBITDA, as adjusted by Moody's, were to deteriorate sustainably above 3.5x; (3) RCF/debt, as adjusted by Moody's, were to sustainably decline below 20%; (4) liquidity were to weaken, for instance owing to Sappi not being able to proactively manage its debt maturities.

..Issuer: Sappi Limited

Upgrades:

.... Corporate Family Rating, Upgraded to Ba1 from Ba2

.... Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD

Outlook Actions:

....Outlook, Changed To Stable From Positive

..Issuer: Sappi Papier Holding GmbH

Upgrades:

....Senior Unsecured Bank Credit Facility, Upgraded to Ba1 from Ba2

....BACKED Senior Unsecured Regular Bond/Debenture, Upgraded to Ba3 from B1

....BACKED Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 from Ba2

Outlook Actions:

....Outlook, Changed To Stable From Positive

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.

Headquartered in Johannesburg, South Africa, Sappi Limited belongs to the leading global producers of coated fine paper and dissolving wood pulp, along with a product offering in specialty and packaging papers. In addition, the company owns or leases various plantations totalling around 500,000 hectares in Southern Africa. In fiscal 2018, the group generated sales of around $5.8 billion across three segments based on regions: Europe (51% of revenue in fiscal 2018), North America (25%) and South Africa (24%). Sappi is listed on the Johannesburg Stock Exchange, with a broad distribution of ownership and a market capitalisation of around ZAR42 billion as of 24 January 2019.

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.

Martin Fujerik
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke Rindermann
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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