Euro High Yield & Crossovers

Euro High Yield & Crossovers - More Angst than Facts“More Angst than Facts”
7 Credit Drivers
8 Micro Fundamentals: looking good just a little bit longer
10 Credit quality: a delayed but longer US default cycle ahead
11 Market Technicals: issuance and redemptions
12 Valuation & Timing
12 Strategic View: …but no blowout risk
13 Issuer Recommendations
Stephan Haber, CFA (UniCredit Bank) +49 89 378-15191 [email protected]
Dr. Philip Gisdakis (UniCredit Bank) +49 89 378-13228 [email protected]
Dr. Sven Kreitmair, CFA (UniCredit Bank)
+49 89 378-13246 [email protected]
Christian Aust, CFA (UniCredit Bank)
David Bertholdt
Fundamental Credit Views
21 Sappi (Buy)
80 HeidelbergCement (Hold)
87 Italcementi (Buy)
93 Wienerberger (Hold)
99 Xella (Hold)
127 Ardagh Glass (Sell secured/Piks, Hold unsecured)
136 Bombardier (Sell)
169 ista (Hold)
176 KION (Hold)
182 Manutencoop (Buy)
216 CNH Industrial (Sell)
263 Peugeot (Hold), Banque PSA (Hold)
268 Piaggio (Sell)
274 Rhiag (Hold)
280 Schaeffler (Hold)
303 Cirsa (Buy)
310 Douglas (Hold)
318 Gamenet (Hold)
330 Ontex (Buy)
342 Thomas Cook (Hold from Buy)
348 TUI (Hold)
354 Zobele (Hold)
377 RCS & RDS (Hold)
397 Unitymedia (Hold), UPC (Hold), Virgin Media (Buy), Ziggo (Hold)
Telecommunication 422 Matterhorn Telecom (Sell)
430 Oi (Hold)
443 Telecom Italia (Hold)
465 TeamSystem (Hold)
In this 31st issue of our HYCO publication, we provide a detailed analysis of around 70 high-yield corporates comprising credit drivers, credit-profile developments, SWOT analyses, liquidity analyses, financial forecasts for 2015 and 2016, corporate structures, bond-documentation summaries and recommendations.
Recent credit news has been dominated by China headlines, commodities and the Fed. Of course, all three items are somewhat interrelated. The plunge in Chinese stock markets – which shaved 40% off the market cap of the Shanghai stock index – increased concerns that a broader and deeper EM crisis might affect the economic prospects of European companies with sales exposure to China and other EM countries. However, while some sectors (particularly Oil and Gas and Basic Resources) may remain vulnerable, European companies are faring well overall thanks to healthy domestic demand growth. Although fundamental differentiation is crucial, rising overall risk aversion is not warranted. Hence, recent spread widening has created ample opportunity to selectively add risk, even if the China and commodity stories are also part of a bigger theme in global markets: the potential consequences of the upcoming end of cheap money and the relative performance trend of emerging economies versus developed ones. In this publication, we shed some light on these developments.
Top Story: Over the last 15 years, there has been a close relationship between the performance of commodities and EM stock markets. The sharp drop in the commodity index level at the short end of the curve is mostly due to the plunge in oil prices. While the immediate risks to EM stocks from such a correlation should not be exaggerated, it highlights corresponding downside risk. The key question regarding EM is whether a more pronounced correction in EM assets could result in a correction in OECD assets.
Macro Outlook: The eurozone’s economic recovery remains well established, but a number of uncertainties loom. These stem primarily from the market reaction to the upcoming start of the Fed’s rate-hike cycle and from emerging markets’ performance.
Micro Fundamentals: The fundamental picture remains fairly sound amid the eurozone’s recovery. Total debt has been trimmed, and issuance has slowed this year. Our constructive stance is supported by the rating trend, which continues to be positive.
Credit Quality: Default rates are likely to stay low for some time, but when the tables turn, the cycle could last much longer than it did during the financial crisis. Since the end of the recession, the rating composition in the US has deteriorated significantly, with the share of B3 rated issues having risen from 58% to 72%.
Market Technicals: After an even stronger start to the new year, issuance activity started to cool in the second quarter of 2015 amid climbing sovereign yields and consolidating spreads. Nevertheless, the total outstanding volume has since grown by EUR 21bn to EUR 236bn in the iBoxx HY NFI.
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UniCredit Research page 5 See last pages for disclaimer.
Top Story: China, commodities and the Fed Recent credit news has been dominated by China headlines, commodities and the Fed.
Of course, all three items are somewhat interrelated. On the single-name side, Alpha Natural Resources (the second-biggest US coal miner) filed for Chapter 11 protection and more companies may follow. Of eight companies in the Bloomberg US Coal Operations stock index, four have lost more than 80% of their market capitalization in the last six months and three more than 50%. But also here in Europe, bonds of energy-related companies experienced partly strong price volatility. Although not directly related to the commodity crisis, bonds of Abengoa, for example, the Spanish renewables company, plunged to a price of 60% a level usually deemed close to recovery value, implying an imminent threat of default, followed by weeks of substantial price swings. Tereos, a French company active in the sugar business, saw its bond price drop 15pt due to concerns that cheap oil prices might reduce demand for more-costly alternative fuels. Moreover, the plunge in Chinese stock markets – which shaved 40% off the market cap of the Shanghai stock index – added to concerns that a broader and deeper EM crisis might affect the economic prospects of European companies with sales exposure to China and other EM countries. However, the China and commodity stories are also part of a bigger theme in global markets: the potential consequences of the upcoming end of cheap money, and the relative performance trend of emerging economies versus developed ones. In following, we shed some light on these developments.
EM assets remain vulnerable Over the last 15 years, there has been a close relationship between the performance of commodities and EM stock markets. This is highlighted by our left chart below, depicting the MSCI EM together with the weighted average of the GSCI Energy and Industrial Metals indices. The sharp drop in the commodity index level at the short end of the curve is mostly due to the plunge in oil prices. That plunge has resulted in a decoupling of the two time series. While the implications for immediate risks to EM stocks on the back of such a correlation should not be exaggerated, it highlights the corresponding downside risks. Moreover, as highlighted in the right chart below, equities in developed economies have outperformed EM equities since about 2011. While EM stocks have moved more or less sideways in quite a broad range, developed market stocks have risen about 60%, despite the sovereign-debt crisis weighing on European stock markets to some extent. Furthermore, the MSCI EM index dropped below important technical support levels established since October 2010 (see dotted line in the right chart below).
EMERGING MARKET EQUITIES
…vs. major commodities (based on GSCI indices) …and vs. developed market equities
Source: Bloomberg, UniCredit Research
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However, the higher relative attractiveness of OECD risky assets over EM ones is hardly a new insight, as highlighted by the left chart below depicting the Composite Leading Indicators for the OECD and various EM countries. Moreover, the developments in China resulted in a significant widening in the 5Y CDS spread for China and the iTraxx Asia ex. Japan (see right chart below). In the light of these developments, the key question regarding EM is whether a more pronounced correction in EM assets could result in a correction in OECD assets.
EM RISK PERCEPTION
Composite Leading Indicators for OECD and EM 5Y CDS on China and iTraxx Asia ex Japan
Source: OECD, Bloomberg, UniCredit Research
While a good deal of caution is always advisable as the above-mentioned single-name examples highlighted, we do not think that an overly bearish stance is appropriate. While a further consolidation – in particular in equities – is always possible, it should not be ignored that in particular the plunge in commodity prices (in particular in the oil price) is a decisive factor supporting the European economy. The lower oil price additionally boosts domestic demand, which is already on the rise as the periphery recovers from the sovereign debt crisis. August EU27 car registrations, which came in quite strong (rising to a rate of 11.2% yoy from 9.5% the month before) nicely illustrate this development. The August number was the second highest in 2015 (June was 14.6% yoy) and the third highest since the peak in late 2009, when car sales were boosted by support measures such as the German Abwrackprämie (scrappage program). Hence, the rise in domestic demand is clearly able to mitigate declining demand from EM economies. And this development also illustrates that a large part of the powerful implications of the drop in energy prices are still unfolding. Furthermore, the shifting focus of global investors from the EM universe to developed economies will result in reversing fund flows. With money flowing back into developed economies, the valuations of risky assets in Europe will remain well supported.
While fundamental differentiation is crucial, risk aversion is unwarranted
In summary, while some sectors (particularly Oil and Gas and Basic Resources) may remain vulnerable, European companies are faring well overall due to healthy domestic demand growth. While fundamental differentiation is crucial, rising overall risk aversion is not warranted. Hence, recent spread widening has created ample opportunity to selectively add risk.
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Credit Drivers
Macro: constructive picture despite vulnerabilities Notwithstanding the fact that the eurozone economic recovery remains well
established, a number of uncertainties loom. These stem primarily from the market reaction to the start of the Fed’s rate-hike cycle and from emerging markets’ performance. However, the Chinese government’s announcement of fiscal spending, the ECB standing ready to act with additional stimulus and Fed policymakers prudently weighing the central bank’s next steps are factors behind our constructive view.
Well-established pace of recovery on the back of household consumption
The latest eurozone GDP data confirmed a well-established pace of recovery, stemming largely from a stronger (than in recent recoveries) contribution from household consumption, though the slowdown in emerging markets represents a drag factor on eurozone economic growth. The key driver of the household consumption is the faster growth of household spending being supported by the favorable inflation environment going forward. The latter, together with a modest growth outlook, led ECB president Mario Draghi to revive expectations of a second round of quantitative easing recently. All in all, the overall macro picture in the eurozone implies a very low interest rate environment for the foreseeable future, which supports appetite for yield, while the strong household consumption is, in turn, good news for household spending-related sectors, such as Consumer Goods & Services and TMT.
Our economists expect the FOMC to start raising rates in 4Q
While the Fed refrained from a rate hike in September and adopted a wait and see stance to get a better sense of how the latest global developments – i.e. the slowdown in China, the related stock market sell-off and the decline in oil prices – affect the outlook for growth and inflation, our economists expect the FOMC to start raising rates in 4Q. Investors are likely to be well prepared for the step.
EM still a concern but policymakers’ approach reduces spillover risks
The slowdown in emerging markets presents an important risk factor also for high yield credits due to spillover risks. The recent downgrade of Brazil’s sovereign and corporate ratings by S&P to below investment grade – the second BRIC economy after Russia to lose its investment grade from S&P – is a reminder of the worsening momentum in economic and political prospects in one of the major emerging markets. However, although the growth differential to DM is shrinking, our base scenario is a gradual deceleration of EM growth (to 6.6% in 2015 from 6.8% last year and further to 6.4% in 2016 – IMF forecasts). Moreover, the prudent approach by Fed policymakers and swift action by the Chinese government to step in with a (USD 180bn) fiscal stimulus limits our concerns of major market disruptions.
GROWTH DIFFERENTIAL BETWEEN EM AND DM HAS DECLINED, INCREASING EM RISK
Growth differentials between emerging and advanced economies JPM CEMBI spread index vs. iTraxx XO
Source: IMF, Bloomberg, UniCredit Research
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Micro Fundamentals: looking good just a little bit longer While fundamentals remain sound, global concerns have created fresh opportunities. Pick-up in eurozone growth key to corporate risk
The ongoing pick-up in eurozone growth is beginning to be reflected in the currency bloc’s unemployment rate, which dropped to its lowest level since February 2012 (10.9% in July). This bodes well for domestic demand going forward and should support corporate risk as well. With central banks still cautious, corporate bonds could enjoy the near-optimal environment of positive, albeit below long-term average growth rates and ultra-low yield levels for some time longer. Following the recent consolidation in risk premiums, the appeal of higher-yielding corporate debt will continue to attract investor interest, especially as the fundamental picture remains fairly sound amid the eurozone recovery. Total debt has been trimmed (left chart) via debt-reduction measures and slowing issuance this year. This has also decreased dispersion in the iBoxx HY NFI, which had grown for almost three years: the upper quartile debt level (light red line in the left chart) has declined by EUR 2.4bn to EUR 8.9bn YTD. While the median debt level is just slightly lower (EUR 80mn) since end-2014, the intermediate rise that took place in 1H (as high as EUR 3.8bn) has been levelled. Leverage ratios have remained fairly stable in 2015 after declining in 2H14 (right chart).
IBOXX HY NFI TOTAL DEBT AND LEVERAGE
iBoxx HY NFI total debt (adj., EUR mn) iBoxx HY NFI leverage (net debt adj./EBITDA adj.)
Source: UniCredit Research
Spread widening has been fairly orderly and has taken place predominantly in commodity-related sectors
Despite the sound fundamentals, risk premiums have been pushed wider as growth concerns in EM and price declines in commodities added to heightened risk aversion. So far, investors are not shying away from riskier assets in general, but rather on a selective basis. While sectors that are more directly affected by the Asian growth concern (Oil & Gas, Basic Ressources) have underperformed, the riskier end of the HY market has not shown disproportionate widening. The usual underperformance of CCC compared to B and B to BB notes during times of stress has not taken place in the recent weakening. In fact, the spread ratio of B over BB and CCC over B has been fairly steady (top left chart overleaf). This proportionate widening suggests that the current re-pricing is relatively orderly, arguing in favor of a consolidation rather than a sustained deterioration, in which case investors would be more concerned about the recovery overall and potential jumps in default rates. Hence, we think that high-yield spreads have room to come down from their elevated levels, regardless of the pending first rate hike by the Fed.
Rating drift continues to be positive
The constructive stance is supported by the rating trend, which continues to be positive, albeit at a reduced action rate. Across the three major rating agencies, the rating-action rate for iBoxx HY NFI issuers is at 0.48 (red line in the right chart below) – meaning that less than five out of ten issues have experienced a rating action. The rating-action rate and drift are calculated based on the last twelve months with the rating drift in positive territory since May 2014. At 0.12, the rating drift indicates that an issue that experienced a rating action was upgraded, on average, by one eighth of a full notch in the past twelve months – or otherwise, that one in eight issuers received a one-notch upgrade.
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IBOXX HY NFI SPREAD RATIOS BY RATING AND RATING DRIFT
iBoxx NFI spread ratios by rating iBoxx HY NFI rating action rate (rs) and drift
Source: UniCredit Research
US vs. European HY – less pick-up than it appears
Part of the pressure on spreads has been exerted via the US, where the HY Master Index has climbed over 100bp since June to over 500bp and investors pushed back risk premiums to levels last seen at the end of 2012. This left US HY with a significant premium (91bp) to Europe. However, large parts of the premium stem from the differing compositions in indices, as the European index is tilted much more in favor of BB issues (around 70%). The US HY Master and the iBoxx NFI trade almost level when recalculating the spread of the US index with the European rating weights (light-red dashed line in the left chart below).
Yield advantage of US HY at peak level
In absolute terms, the yield difference (2.5%, right chart below) between US (7.35%) and European HY (4.9%) is back to peak levels. The difference in the BB yield is still significant but the driver of the renewed build-up in yield pick-up is the riskier rating categories. The discount that is historically seen in B and CCC US HY notes vs. their European peers has been shrinking in recent months, as investors are presumably becoming more cautious. As rate hike expectations have been pushed back, this yield premium of US HY appears sufficient to buffer rising sovereign yield levels and to allow the US to outperform Europe.
US VS. EUROPE LEVEL IN SPREADS BUT NOT IN YIELD
US HY Master vs iBoxx EUR HY NFI (ASW, bp) Yield premium US vs. European HY at peak levels
Source: Bloomberg, Markit, UniCredit Research
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Credit quality: a delayed but longer US default cycle ahead Default rates are likely to stay low for some time, but when the tables turn, the cycle
could last much longer than it did during the financial crisis.
Default rates typically rise when rates are cut rather than when they are raised
As the first FOMC rate hike since 2006 approaches, investors are becoming increasingly concerned about declining credit quality and potential defaults going forward. However, even if rate hikes start soon, this does not automatically mean that the beginning of the default cycle will start soon after as well. Typically, default rates do not rise strongly when rates are raised, but when rates are cut, as this indicates economic trouble ahead (left chart).
The next default cycle will be longer, but with a lower peak default rate
The next US default cycle could be closer to the average in terms of length and severity than that experienced in the aftermath of the financial crisis, according to Moody’s. This means the duration of the default cycle is expected to be longer, but to show lower peak levels than in 2008/09, when defaults surged to almost 15% over a 21-month cycle. In the preceding default cycles ending in 1992 and 2004, the cycles lasted 37 and 57 months, respectively, with the long- term average default cycle lasting 38 months and peaking at a default rate of just under 9%.
The share of B rated firms in the US has risen sizably
Since the end of the recession, the rating composition in the US has deteriorated significantly, with the share of B3 rated issues having risen from 58% to 72% on the back of high demand for yield pickup. Moody’s notes that annual average default rates for B rated issues in those years fully encompassed by default cycles (1990-92, 2000-02 and 2009) were 3.7% (B1), 9.3% (B2) and 18.3% (B3). This compares unfavorably to the average one-year global default rates for these rating groups between 1983 and 2014 (at 2.2%, 3.4% and 5.6%, respectively). In Europe, the picture is completely different, with the BB share having climbed from 48% to 68% most recently (right chart).
Next default cycle expected to be more like average than like financial crisis
The length of a default cycle and its severity are important for a couple reasons. The default rate influences firm-wide recovery rates and the mix of default types may be influenced by the duration, or perceived duration, of a default cycle, according to Moody’s. The comparatively short duration of the last default cycle was aided by government intervention and showed a significantly different default mix from previous cycles. Whereas around 85% of rated US defaults have historically ended in bankruptcy, this percentage declined to approximately 65% in the default cycle during the financial crisis. Moody’s attributes this to the realization by lenders and borrowers that the US central bank’s liquidity injections would lead to a rapid decrease in default rates and that distressed companies were able to wait out the default cycle with a distressed debt exchange, rather than filing for bankruptcy.
DEFAULT RATE AND FED FUNDS – STILL TIME BEFORE THE NEXT CYCLE STARTS
US and European default rates vs. FOMC policy rate (RS) iBoxx EUR HY NFI outstanding volume by rating
Source: Moody’s, Bloomberg, UniCredit Research
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Market Technicals: issuance and redemptions HY issuance has slowed after a strong start to 2015
After an even stronger start to the new year (1Q saw 52 issues with a total volume of EUR 24.6bn, while EUR 18.5bn were printed in 1Q14 via 42 bonds), activity already started to cool in the second quarter amid climbing sovereign yields and the consolidation of spreads on the back of uncertainty surrounding Greece. While in 2014, issuance accelerated in 2Q to EUR 27.4bn via 66 new HY notes, new deal volume in 2Q15 slipped one third to EUR 16.9bn from a total of 39 new issues. This year’s third quarter also sizably trails (-38%) primary market activity compared to last year: midway through September 2015, the tally for 3Q has reached EUR 9bn from 23 bonds, which compares to an issuance volume of EUR 13.7bn across 37 notes in 3Q14. Nevertheless, the total outstanding volume has grown by EUR 21bn to EUR 236bn in the iBoxx HY NFI, with the biggest contributors being Industrials (EUR 50.1bn), Consumer Goods (EUR 42bn) and Telecommunications (EUR 39.2bn). Oil & Gas (EUR 18.2bn) has become the fifth-biggest sector this year after Gazprom and Petrobras entered the index in March with EUR 13.7bn in bonds following their downgrades.
Low-maturity volumes until end-2016 will likely meet persisting demand for yield
Overall, the slightly lower issuance level is unfolding as expected, albeit we do not see a further acceleration in sovereign yield increases but rather a gradual increase in risk-free yields towards year-end. The levelling-off in issuance comes as many companies have pre- financed redemptions. With maturity schedules diminishing and less than EUR 19bn in notes coming due over the next five quarters, supply should remain fairly contained going forward, while interest in higher-yielding paper will likely continue to prevail.
YTD HIGH YIELD ISSUANCE AND REDEMPTION STATISTICS
Issuance Issuance by quarter (EUR mn)
Yearly redemptions by sector Amount outstanding by sector
Source: iBoxx, UniCredit Research
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Valuation & Timing Tactical View: near-term widening pressure might persist…
Over a tactical time horizon (up to three months), we think that the pressure on HY credits might persist.
First, a rate hike by the Fed remains in the pipeline, which will result in a continuing debate about the potential implications on FI assets in general and HY and EM credits assets in particular. While for the time being, the ECB’s monetary policy stance will remain accommodative, one should not overlook the potential psychological implications of a successful lift off by the Fed. Many commentators criticized unorthodox monetary easing measures (such as quantitative easing) because of concerns that it would be tough for policy makers to normalize monetary policy thereafter. However, if the Fed manages to turn around the monetary policy trajectory successfully, this could have repercussions regarding monetary policy expectations, also resulting in a steepening of European yield curves. And this, in turn, could result in a shift in asset allocation, putting spreads under pressure.
Second, there are no credible signs that the triggers of the recent volatility – the plunge in commodity prices and the EM crisis – will be reversed any time soon. Hence, the corresponding pressure on those sectors and companies that are exposed to these developments will also persist.
Strategic View: …but no blowout risk While some concerns regarding near-term volatility are clearly warranted, we also think that
an overly pessimistic stance towards European credits is not justified, for three reasons:
First, the European economy continues to recover, with domestic demand an important driver (bear in mind the strong EU27 car registration as an indicator). This is supported by low energy costs, which act like a tax cut. Clearly, with global trade stagnating, as indicated by our proprietary Global Leading Indicator, export-oriented businesses will feel some pressure, a significant part of which is already discounted in the corresponding equities. The corresponding credits, on the other hand, have remained roughly stable.
Second, monetary policy will continue to be expansive in Europe, which will support the economy. In such an environment, a spike in systemic risk aversion is not very likely.
Third, the declining prospects in emerging markets will result in a reversal of fund flows back into developed economies. The resulting investment needs by portfolio managers will also keep European credit assets supported technically.
SPREAD FORECAST AND SPREAD DEVELOPMENT OF COMMODITY-RELATED HY SECTORS (BP)
Spread forecast (bp) Commodity-related sectors (bp)
Source: Bloomberg, Markit, UniCredit Research
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Issuer Recommendations RECOPMMENDATION OVERVIEW
Schmolz + Bickenbach Stora Enso
Construction CMC di Ravenna Italcementi
Buzzi Unicem HeidelbergCement AG
Abengoa S.A.
Manutencoop
Ardagh Packaging Group Plc Bombardier Inc.
Automobiles & Parts Grupo Antolin Faurecia
FCA HP Pelzer
GESTAMP Peugeot Rhiag
Douglas Gamenet S.p.A.
Zobele Group
UPC Ziggo BV
Telecom Italia Group
Lecta (Hold) Recommendation We keep a hold recommendation on Lecta. Despite the fact that LECTA 05/19 is trading at
a yield-to-next-call of 5.0% and that LECTA FRN yields 5.5% – assuming refinancing at the LECTA 19s’ call-price step date in May 2016 – we think the odds of there being an early call very much depend on an overall tightening environment towards year-end 2015/early 2016 (and we would prefer higher-beta CCCs in that environment) and on the successful raising of coated woodfree (CWF) prices from July 2015 on, in view of continued volume pressure.
Credit drivers Structural demand pressure in the European graphic-paper industry, including persistent overcapacity
Ongoing restructuring efforts (including capacity adjustments) to further stabilize and to sustainably turn around operating performance of the group
Potential active industry consolidation with Lecta “interested in exploring opportunities” with peer Burgo (a tie-up would create the largest CWF paper manufacturer in Europe)
KEY PERFORMANCE INDICATORS
Pricing is clearly improving Restructuring is starting to benefit EBITDA margins
Source: company data, UniCredit Research
Latest earnings review Lecta reported 2Q15 results that beat our estimates. A 1% decline in paper volumes (which implies market-share gains) and lower energy sales were more than offset by better paper prices (+3% to average EUR 904/t). While we had expected slightly lower revenues in 2Q15, sales increased 1.7% yoy to EUR 374.5mn in 2Q15, which marked the first sign of quarterly top-line growth since the consolidation of Polyedra in 4Q12. Reported group EBITDA of EUR 21.8mn (-6% yoy) was impacted by the EUR 6.5mn one-off effect of PaperlinX’s insolvency, while the underlying EBITDA margin of 7.6% was sequentially stable in 2Q15 but up yoy as higher pulp costs were offset by reduced labor and energy costs. Lecta stated that its unit gross margin further improved in 2Q15. Higher-than-expected seasonal W/C-related inflow (EUR 37mn) and lower capex (EUR 6mn) were the main drivers of improved FCF of EUR 21mn in 2Q15 (vs. FCF of EUR 15mn last year). Hence, the company’s reported cash position improved to EUR 150mn at end-June 2015, with the EUR 80mn RCF remaining untapped. Adj. net leverage improved to 4.6x at end-June from 5.0x in 1Q15 and 4.8x at FYE 2014.
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Credit profile development Given the structural demand pressure for CWF paper in Europe (CWF still represents 73% of Lecta’s LTM 1H15 EBITDA), with European shipments roughly 35% below their 2007 level, Lecta is undergoing significant restructuring in order to turn around and improve its operating performance. According to EURO-GRAPH, CWF paper volumes continued to decline in 1H15, but the benefits of Lecta’s cost-savings program and improving CWF prices supported the further stabilization of Lecta’s EBITDA in 1H15. Lecta’s cost-reduction program targets EUR 42mn of fixed-cost savings, of which EUR 29mn had been achieved by FYE 2014. However, given the structural demand trend and despite the positive price trend in 1H15, further significant industry-wide capacity reductions are needed, in our view, to rebalance supply with demand on a sustainable basis. While major European CWF producers (e.g. Sappi, Lecta, Burgo) have announced permanent capacity closures in Europe of more than 1mn tons in recent quarters (which have contributed to higher prices since end-2014), we believe further capacity consolidation is necessary (e.g. via a tie-up of Lecta and Burgo, which however seems off for the time being following Burgo’s debt restructuring).
Company outlook / key model assumptions
During its 2Q15 call, Lecta mentioned its FY15 EBITDA guidance is for approximately EUR 110mn (“increase similar to 2014 vs. 2013”, which was an increase of EUR 10mn to EUR 100mn), and its management, for the first time in recent memory, talked about actively looking into the early redemption of its callable bond structure. While the company’s FY15 EBITDA outlook is slightly higher than the EUR 105mn we had expected so far for this year, the guidance looks achievable. Lecta generated EBITDA of around EUR 59mn in 1H15 (adj. for EUR 8.3mn of one- offs), which implies a sequentially stable EBITDA result in 2H15 (no additional one-offs expected, according to management) in order to meet the full-year guidance.
In 2H15, earnings should be supported by further rising prices – Lecta highlighted a EUR 10/ton rise in prices in July alone (compared to end-June), i.e. initial success with regard to the announced CWF-paper price increase from July 2015 – as well as by cost savings and lower energy prices. This should more than offset the impact from the continued structural pressure on paper volumes (Lecta’s order intake was down 4% yoy as of end-July) and offset the impact from yoy-higher pulp prices – although the trend in the price of bleached hardwood (eucalyptus) pulp might turn around given additional capacity and slowing demand in China. Hence, adj. EBITDA/net debt should slightly improve towards 4.4x by FYE 2015 (from 4.6x at end-June 2015), which might provide the basis to refinance the callable EUR 390mn FRN 05/18 (pays E+550bp) and the EUR 200mn 8.875% 05/19 bond (currently callable at a price of 106.656). Management has indicated that it will look into the potential refinancing/terming- out of the bonds towards year-end 2015 or at the next call-price step in May 2016, but this clearly depends on market conditions.
THINGS TO WATCH
3Q15 results: end-November
Development of graphic paper prices and volumes as well as pulp and energy costs
Potential refinancing activity and/or efforts to consolidate the European CWF market
Christian Aust, CFA (UniCredit Bank) +49 89 378-12806 [email protected]
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Lecta Group Analyst: Christian Aust, CFA (UniCredit Bank), +49 89 378-12806 Corporate Ratings Rating Outlook Credit Profile Trend Recommendation Index Mcap B2/B/-- STABLE/STABLE/-- Stable Hold --/iBoxx HY/-- Not listed
Company Description: Headquartered in Luxembourg, Lecta is one of the leading European producers of coated fine paper (capacity of 1,200,000 tons) and specialty paper (200,000 tons). It was established in 1997 by the private equity firm CVC to acquire Italian paper manufacturer Garda and was subsequently expanded with the takeovers of French Condat in 1998 and Spanish Torraspapel in 1999. Today, the group's main focus is on southern
Europe and France, where it commands leading market positions. Besides paper production, Torraspapel is also active in the distribution of paper in Spain, Portugal, Argentina and France. Additionally, Lecta operates a pulp mill (through Torraspapel). The company is majority-owned, i.e. about 57% of total voting rights, by CVC; its remaining shares are held by other investors and by management.
SALES BY REGION (1H15)
Strengths/Opportunities – Good market position as the second-largest producer of coated fine paper
in Europe – Good cost position supported by lower transportation and distribution costs
and a well invested asset base – Solid liquidity position to support transformation
Weaknesses/Threats – Cyclical and capital-intensive business – Limited vertical integration into fiber and pulp, although the latter benefits
the company in times of low pulp prices – Structural challenges in the industry limit pricing power – Limited business and geographical diversification – Highly leveraged financial profile
DEBT MATURITY PROFILE AS OF 30 JUNE 2015
LIQUIDITY ANALYSIS
– Lecta benefits from strong liquidity on the back of a cash pile of EUR 150mn at the end of 1H15 (EUR 139mn net of overdrafts) and full access to an unused committed RCF of EUR 80mn (due in 2018, no maintenance covenants).
– Lecta has only limited short-term maturities of EUR 23.2mn, related to overdrafts (EUR 11.3mn) and other financial debt (EUR 11.9mn).
Europe 82.3%
Americas 11.4%
RoW 6.3%
Coated woodfree
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CAPITALIZATION
Debt Instrument Ccy Interest Maturity First call Outst. (EUR mn) Net Lev. Moody's* S&P* EUR 80mn RCF EUR E+425bp May-18 0
Total Super Senior Sec. 0 0.0x Lecta SA EUR EUR003M+550bp May-18 May-14@101 390 49% 30-50% Lecta SA EUR 8.875% May-19 [email protected] 200 49% 30-50% Bank overdrafts EUR 11 Total Senior Secured 601 5.3x Other debt EUR 12 Total Secured 613 5.4x Non-recourse debt 2 EUR 28 Total Senior 642 5.6x Cash & Cash equivalents EUR -150 Total Net Debt 491 4.3x Adjusted EBITDA LTM EUR 114
*Recovery Rate Source: UniCredit Research
CORPORATE STRUCTURE
*Condat SAS is required to give notice to its workers in order to provide a guarantee for the notes. Source: company data, UniCredit Research
Lecta S. A.
Condat SAS*
EUR 390mn FRN 05/18 EUR 200mn 8.875% 05/19 EUR 80mn RCF line 2018
Sub Lecta 3 SA
PROFIT AND LOSS (LECTA GROUP)
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1Q14 2014 1H15 2015E 2016E Sales 1,520 1,601 1,380 1,522 1,577 1,624 1,585 383 1,491 751 1,506 1,476
adj. EBITDA as reported 152 138 155 161 162 139 90 50 100 57 111 113 EBITDA exceptionals 7 65 1 1 5 79 50 9 12 10 12 5 EBITDA reported 145 73 154 160 157 60 40 40 89 47 99 108 EBIT 58 -17 76 82 85 -13 -30 9 29 19 31 43
Net income -30 -78 12 26 24 -64 -113 -10 -67 -18 -45 -33
PROFITABILITY RATIOS
adj. EBITDA margin as reported 10.0% 8.6% 11.2% 10.6% 10.3% 8.5% 5.7% 13.0% 6.7% 7.6% 7.4% 7.6% EBITDA margin reported 9.6% 4.5% 11.2% 10.5% 10.0% 3.7% 2.5% 10.6% 6.0% 6.3% 6.6% 7.3%
EBIT margin 3.8% -1.1% 5.5% 5.4% 5.4% -0.8% -1.9% 2.4% 2.0% 2.5% 2.1% 2.9%
CASH FLOW
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1Q14 2014 1H15 2015E 2016E EBITDA clean (UniCredit) 152 138 155 161 162 148 98 28 107 60 118 119 Adjustments/restructuring -10 -10 -37 1 -13 -10 -33 -5 -25 -15 -29 -16
Interest -86 -75 -55 -45 -46 -59 -64 -11 -64 -31 -65 -70 Tax -2 -5 -3 -4 -8 -7 -1 0 -8 -1 -1 -1 FFO (funds from operations) 54 48 60 112 95 72 -1 12 10 13 23 32 Change in working capital -21 5 58 23 18 -25 69 -37 15 9 7 1
Operating cash flow 33 53 118 135 113 47 68 -25 25 22 30 33 Capex -59 -56 -45 -27 -51 -51 -45 -10 -48 -27 -40 -35 Free operating cash flow -26 -3 73 108 61 -4 23 -36 -23 -5 -10 -2 Dividends -1 0 -2 -2 -6 -1 -3 -1 -1 0 -3 -1
Acquisitions/disposals 19 -56 2 2 -4 -31 9 0 1 0 0 0 Share buybacks/issues 0 0 0 0 0 0 0 0 0 0 0 0 FCF -9 -59 73 108 51 -36 29 -36 -23 -5 -12 -3
CAPITALIZATION
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1Q14 2014 1H15 2015E 2016E Equity 455 358 365 386 403 330 219 208 152 134 143 141 Senior secured bank debt/bonds 622 657 659 657 674 658 647 645 642 642 632 630 Unsecured debt 150 150 148 143 120 0 0 0 0 0 0 0
Total debt 772 807 807 800 794 658 647 645 642 642 632 630 Cash 181 142 214 310 362 178 192 149 158 150 146 144 Net debt (total debt minus cash) 591 665 593 490 432 480 456 495 484 491 486 487
LEVERAGE RATIOS
Senior secured debt leverage 4.1x 4.8x 4.2x 4.1x 4.2x 4.5x 6.6x 6.6x 6.0x 5.6x 5.4x 5.3x
Unsecured debt leverage 5.1x 5.9x 5.2x 5.0x 4.9x 4.5x 6.6x 6.6x 6.0x 5.6x 5.4x 5.3x Net debt leverage (unadjusted) 3.9x 4.8x 3.8x 3.0x 2.7x 3.2x 4.7x 5.1x 4.5x 4.3x 4.1x 4.1x Total debt leverage (unadjusted) 5.1x 5.9x 5.2x 5.0x 4.9x 4.5x 6.6x 6.6x 6.0x 5.6x 5.4x 5.3x
DEBT ADJUSTMENTS
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1Q14 2014 1H15 2015E 2016E For pensions 29 31 29 42 41 36 26 26 27 27 26 26 For operating leases 17 14 12 11 21 25 20 20 16 16 16 16 Others* 0 0 0 0 0 0 0 0 0 0 0 0
Total adjusted net debt leverage 4.0x 4.9x 4.0x 3.3x 2.9x 3.6x 5.1x 5.5x 4.8x 4.6x 4.4x 4.4x Total adjusted FFO/net debt 9.1% 7.2% 9.8% 21.2% 20.2% 14.7% 1.0% 0.5% 2.9% 4.1% 5.4% 7.2%
*Contingent liabilities, guarantees Source: company data, UniCredit Research
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BOND DOCUMENTATION – LECTA 8.875% EUR 200MN 05/19 SENIOR SECURED
Issuer Lecta S.A., Luxembourg Call/Put Call Schedule On or after May 15, 2015: @ 106.656%, May 15, 2016: @ 104.438%, May 15, 2017: @ 102.219%, May 15, 2018 and
thereafter @ 100.000%. Equity Clawback expired Make-whole Clause expired Change of Control 101%, if more than 35% of the total voting power and more than the permitted holders or a ratings decline occurred
after a change of control event. Guarantees Guaranteed by Sub Lecta 1 S.A.; Sub Lecta 2 S.A.; Sub Lecta 3 S.A.; Cartiere del Garda S.p.A.; Lecta HQ S.A.;
Torraspapel S.A.; Sarriopapel y Celulosa S.A.; and Condat Holding S.A.S. Guarantors represented approximately 70% of the company's consolidated EBITDA, whereas Condat S.A.S. is intended to provide guarantee after the issue date.
Security Granted directly in favor of the Security Trustee (the "Collateral"). Ranking Pari passu in right of payment with all existing and future debt of the company that is not subordinated to the notes. Certain Covenants Limitation on Debt Fixed charge coverage ratio of at least 2.5x
Most important carve-outs/exceptions: i. General basket may not exceed EUR 115mn at any time ii. Debt under credit facilities and refinancing debt may not exceed EUR 80mn iii. Debt of Polyedra may not exceed EUR 25mn, if it becomes a restricted subsidiary iv. EUR 5mn CLO/PMO basket v. Guarantees by the company or restricted subsidiary of debt incurred by joint ventures or by capitalized lease
obligations may not exceed EUR 5mn each. Limitation on Sale of Certain Assets No asset disposition unless:
i. Asset disposition is at least equal to the fair market values (100%) ii. At least 75% of such consideration consists of cash or cash equivalents iii. Total asset disposition may not exceed EUR 5mn per year.
Limitations on Investment i. Investment in permitted joint venture transactions may no exceed EUR 20mn ii. General basket may not exceed EUR 10mn.
Limitation on Restricted Payments Aggregate amount of such restricted payment may not exceed an amount equal to the sum of: i. 50% of the aggregate consolidated net income accrued during the period ii. Capital stock sale proceeds and capital stock contributions iii. EUR 75mn in total.
Limitations on Transactions with Affiliates i. De minimus threshold of EUR 2mn ii. Board resolution for transactions that exceed EUR 5mn iii. Fairness opinion if transaction greater than EUR 20mn.
Fall away/ Suspension Covenants Yes, if Notes achieve investment grade. Negative Pledge No Anti Layering No Cross-default Yes Step-Up/Down Rating Change No
Source: Company data, UniCredit Research
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BOND DOCUMENTATION – LECTA E+550% EUR 390MN 05/18 SENIOR SECURED
Issuer Lecta S.A., Luxembourg Call/Put Call Schedule On May 15, 2015 and thereafter 100.000%. Equity Clawback No Make-whole Clause expired Change of Control 101%, if more than 35% of the total voting power and more than the permitted holders or a ratings decline occurred
after a change of control event. Guarantees Guaranteed by Sub Lecta 1 S.A.; Sub Lecta 2 S.A.; Sub Lecta 3 S.A.; Cartiere del Garda S.p.A.; Lecta HQ S.A.;
Torraspapel S.A.; Sarriopapel y Celulosa S.A.; and Condat Holding S.A.S. Guarantors represented approximately 70% of the company's consolidated EBITDA, whereas Condat S.A.S. is intended to provide guarantee after the issue date.
Security Granted directly in favor of the Security Trustee (the "Collateral") Ranking Pari passu in right of payment with all existing and future debt of the company that is not subordinated to the notes. Certain Covenants Limitation on Debt Fixed charge coverage ratio of at least 2.5x
Most important carve-outs/exceptions: i. General basket may not exceed EUR 115mn at any time ii. Debt under credit facilities and refinancing debt may not exceed EUR 80mn iii. Debt of Polyedra may not exceed EUR 25mn, if it becomes a restricted subsidiary iv. Guarantees by the company or restricted subsidiary of debt incurred by joint ventures or by capitalized lease
obligations may not exceed EUR 5mn each. Limitation on Sale of Certain Assets No asset disposition unless:
i. Asset disposition is at least equal to the fair market values (100%) ii. At least 75% of such consideration consists of cash or cash equivalents iii. Total asset disposition may not exceed EUR 5mn per year.
Limitations on Investment i. Investment in permitted joint venture transactions may no exceed EUR 20mn ii. General basket may not exceed EUR 10mn.
Limitation on Restricted Payments Aggregate amount of such restricted payment may not exceed an amount equal to the sum of: i. 50% of the aggregate consolidated net income accrued during the period ii. Capital stock sale proceeds and capital stock contributions iii. EUR 75mn in total.
Limitations on Transactions with Affiliates i. De minimus threshold of EUR 2mn ii. Board resolution for transactions that exceed EUR 5mn iii. Fairness opinion if transaction greater than EUR 20mn.
Fall away/ Suspension Covenants Yes, if Notes achieve investment grade. Negative Pledge No Anti Layering No Cross-default Yes Step-Up/Down Rating Change No
Source: Company data, UniCredit Research
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Sappi (Buy) Recommendation We have a buy recommendation on Sappi. Over FY14/15 and FY15/16, we expect Sappi’s
credit metrics to improve on the back of the group’s focus on deleveraging, which should be supported by normalized capex of around USD 300mn annually, benefits from the ongoing restructuring of the company’s European paper business as well as by lower cash interest following refinancing in March 2015 (should result in annual interest savings of about USD 25mn). The (secured) SAPSJ 3.375% 04/22 bond trades at a cash price of 94, or Z-spread +386bp, and offers a significant pickup compared to issues of similarly rated paper and packaging peers, such as SKGID, OI, STERV as well as other BB rated Industrial names.
Credit drivers Progress of restructuring of its European paper operations in order to sustain the operating turnaround despite continuing structural demand pressure for paper
Focus on deleveraging towards the 2.0x reported net debt/EBITDA target (from 3.1x at end-June 2015)
Development of dissolving wood pulp (DWP) prices and margins going forward
Paper operations supported by price increases in FY14/15 Development of EBITDA margin by segment*
*in local currencies Source: company data, UniCredit Research
Latest earnings review Sappi reported 3Q14/15 EBITDA (excluding special items) well below expectations in August. Reported EBITDA of USD 109mn undershot market estimates as well as last year’s USD 140mn as the stronger USD bit twice (Fine Paper NA: import pressure; Fine Paper Europe: raw material prices) and due to heavy maintenance work during the seasonally weakest quarter. While the paper-volume trend remained negative in Europe in 3Q (-5% yoy), prices in the region were stable sequentially and up 3% yoy. In North America, the stronger USD generated paper import pressure from Asia, while paper exports became less competitive. Both were the main drivers of the volume/revenue shortfall in the segment in 3Q15 (-17.6% yoy). Results in Southern Africa (and the dissolving wood pulp business) were impacted by the scheduled annual maintenance shutdowns at the company’s Ngodwana and Saiccor mills. Groupwide maintenance work had a negative impact on operating profit of USD 27mn in the quarter, which was higher than the earlier indication of USD 21mn. Despite lower-than- expected EBITDA generation, FCF remained break-even in the seasonally weak 3Q due to a USD 16mn W/C release (vs. the USD 29mn charge last year), reduced capex and lower interest payments. Hence, reported net debt of USD 1.92bn at end-June 2015 remained unchanged sequentially (still down USD 0.37bn yoy), which translates into qoq slightly higher reported net leverage of 3.1x at end-June 2015.
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Credit profile development Following the completion of the conversion of the company’s mills in Ngodwana, South Africa, and Cloquet in the US in FY12/13, and the increase of DWP capacity to roughly 1.3mn tons p.a., roughly half of Sappi’s group EBITDA is generated from specialized cellulose (70% of operating profit). Management indicated that demand for DWP should continue to expand at a pace of between 6% and 8% p.a. – Sappi’s DWP volumes for 9M14/15 were -4% yoy due to a partial shift back to paper pulp at Cloquet mill in 3Q14/15 – on the back of structural growth trends, namely population growth and the substitution of cotton with viscose staple fibers (VSF). However, weaker VSF prices (due to lower cotton prices) and excess DWP capacity will likely continue to exert pressure on DWP prices in the medium term. Consequently, the EBITDA margin (as a percentage of sales) of Sappi’s DWP business declined from the mid- 30% range to 29% in 9M14/15 but remains in line with the strategic target of between 25% and 30% and clearly above the profitability of the paper businesses (9M14/15 EBITDA margin of 7.0%). Sappi continues to restructure its pressured (European) paper business. Following further capacity rationalization in FY13/14, the EUR 120mn (USD 160mn) three-year investment/conversion program for its Gratkorn and Kirkniemi mills (launched in 2013) should result in further variable and fixed-cost savings from FY15/16 on and support the recovery of the EBITDA margin at Sappi Fine Paper Europe.
Following its CEO change in July 2014, Sappi noted that there will be “no radical change in [strategic] direction in the next two years” and that it remains the group’s priority to use generated cash flow to further strengthen its balance sheet (i.e. reaching the medium-term reported net debt/EBITDA target of 2.0x at end-2016). According to management, progress with regard to reaching the deleveraging target is also essential to Sappi’s reconsidering the distribution of dividends. Hence, we expect net leverage will need to move clearly below 3.0x before it undertakes any shareholder distribution.
Company outlook/ key model assumptions
While Sappi expects graphic paper markets to remain challenging, performance in 4Q should be supported by seasonal factors, and Sappi confirmed its full-year outlook for broadly similar regional operating performance vs. FY 13/14. FX translation effects will likely continue to weigh on group results. However, the seasonal 4Q W/C-related cash inflow (around USD 70mn), interest-cost savings (also resulting in substantially better EPS) as well as the further reduced capex outlook – USD 80mn in 4Q will bring the full-year number to USD 245mn vs. the previous projection of USD 280mn – should imply clearly positive FCF generation in 4Q14/15, and Sappi confirmed the outlook for lower net debt at FYE (yoy as well as qoq). In local currencies and excluding the impact of maintenance shutdowns, EBITDA continued to improve yoy in all three regions, which, in our view, highlights the strength of Sappi’s business model despite the challenging market environment. Additionally, interest savings, capex flexibility (USD 300mn guided for 2016) and, consequently, further net debt reduction (potentially supported by additional disposals of Cape Kraft, Enstra mills and/or forestry assets for around USD 60mn) will support the deleveraging path of the group.
THINGS TO WATCH
Development of paper and (dissolving wood) pulp volumes and prices
Progress with regard to targeted deleveraging
Christian Aust, CFA (UniCredit Bank) +49 89 378-12806 [email protected]
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Sappi Analyst: Christian Aust, CFA (UniCredit Bank), +49 89 378-12806 Corporate Ratings Rating Outlook Credit Profile Trend Recommendation Index Mcap Ba3/BB-/-- STABLE/STABLE/-- Improving Buy --/iBoxx HY/-- ZAR 21.5bn
Company Description: Sappi, headquartered in Johannesburg, South Africa, is among the leading global players in the market for coated fine paper and chemical cellulose, holding leading positions in several of its markets. The company has three reportable segments: Sappi Fine Paper North America, Sappi Fine Paper Europe and Sappi Southern Africa. Annual paper capacity is approximately 6.5mn tons. Pulp capacity is 3.3mn tons, and chemical cellulose capacity is 1.3mn tons (increased from 800,000 tons in 2013).
The company has customers in more than 100 countries and production sites in southern Africa, Europe, North America and Asia. It has a level of self- sufficiency of 95% on a net pulp basis. The company sources its pulp in southern Africa, and around 70% of its wood requirements are either owned by the company (555,000 hectares) or under its management. The company employs around 15,500 people worldwide and is publicly listed.
SALES BY SEGMENT
EBITDA SPLIT BY SEGMENT (BEFORE UNALLOCATED ITEMS)
Strengths/Opportunities – Competitive cost position – Good market position in relevant markets and geographic diversification – Expansion of higher-margin dissolving wood pulp (DWP) business – Good level of self-sufficiency in pulp and thus lower dependency on pulp
price changes in North America and southern Africa – Focus on improving cash generation and net debt reduction supported by
its not paying dividends to shareholders
Weaknesses/Threats – Cyclicality of paper business and structural demand pressure – Price pressure in DWP – Focus on paper production although shifting to specialized cellulose – Exposure to raw material and energy cost inflation – Relatively low level of integration in pulp in European operations
LIQUIDITY ANALYSIS
– We regard Sappi's liquidity as solid, given that it has USD 490mn in undrawn committed credit lines available in Europe and South Africa and a cash position of USD 351mn on hand. It faces short-term maturities of USD 219mn on 30 June 2015 (including USD 112mn of RCF 2020 drawings).
– Short-term debt of USD 107mn (excluding RCF 2020) consists of a short- term portion of long-term debt of USD 41mn and USD 65mn of overdrafts.
– We expect Sappi to deliver solid positive FFO in FY14/15 (USD 450- 500mn) to finance intra-year W/C swings as well as capex needs of ca. USD 245mn.
– Following refinancing in March 2015, liquidity has further improved via the issuance of a EUR 450mn 2022 secured bond and an amendment and increase of the RCF 2020 to EUR 465mn (from EUR 350mn until 2016). Proceeds of the secured bond and drawings under the RCF were used to call the EUR 250mn 2018 and USD 300mn 2019 bonds.
– The amended RCF (maturity 2020) has underlying maintenance covenants of EBITDA/net interest expense of >2.5x and net debt/EBITDA of 4.25x at end-March 2015, declining to 4.0x from June 2015 and 3.75x from June 2019. Under a term loan from Oesterreichische Kontrollbank AG, Sappi has to adhere to a net debt/EBITDA ratio of a maximum of 3.75x in the June 2015-June 2017 period.
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CAPITALIZATION
Debt Instrument Ccy Interest Maturity First call Outst. (USD mn) Net Lev. Moody's* S&P* ZAR 1bn RCF ZAR 0
EUR 465mn RCF 2020 EUR EURIBOR+287.5bp Apr-20 112 61% 70-90% Total Loans 112 0.2x Sappi Papier Holding GmbH USD 7.75% Jul-17 Apr-17@100 400 61% 70-90% Sappi Papier Holding GmbH USD 6.625% Apr-21 [email protected] 350 61% 70-90%
Sappi Papier Holding GmbH EUR 3.375% Apr-22 [email protected] 502 61% 70-90% Total Senior Secured 1,252 2.0x OeKB Term Loan EUR Jun-17 132 Receivables Securitisation 2016 USD 305
Overdrafts, Commerical Paper USD 65 IFRS Adjustment USD -19 Other debt EUR 3 Total Secured 1,850 3.0x Sappi Southern Africa Pty Ltd ZAR JIBA3M+150bp Apr-18 41 Sappi Southern Africa Pty Ltd ZAR JIBA3M+123bp Apr-16 21 Sappi Papier Holding GmbH USD 7.5% Jun-32 221 6% 0-10% Sappi Southern Africa Pty Ltd ZAR 8.06% Apr-20 61
Sappi Southern Africa Pty Ltd ZAR 9.63% Jun-16 41 Sappi Southern Africa Pty Ltd ZAR 2020 33 Total Senior Unsecured 418 0.7x Total Senior 2,268 3.7x Cash & Cash equivalents USD -351 Total Net Debt 1,917 3.1x Adjusted EBITDA LTM USD 611
CORPORATE STRUCTURE
Sappi Limited
Sappi Papier Holding GmbH Austria
Sappi Manufacturing Ltd South Africa
senior secured USD 350mn 6.625% due 2021 EUR 450mn 3.375% due 2022
senior secured
EUR 465mn Revolving Credit Facility due 2020
senior unsecured USD 221mn 7.50% due 2032
senior unsecured ZAR 500mn 9.63% due 2016 ZAR 745mn 8.06% due 2020 ZAR 500mn Float due 2018 ZAR 225mn Float due 2016
100% 100%
senior secured USD 400mn 7.75% due 2017
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PROFIT AND LOSS (SAPPI)
in USD mn 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 9M14/15 2014/15E 2015/16E Sales 5,304 5,863 5,369 6,572 7,286 6,347 5,925 6,061 3,987 5,758 5,931
EBITDA clean 677 740 431 752 821 791 539 650 413 619 691 EBITDA exceptionals -70 69 117 11 324 -70 168 32 -55 -55 0 EBITDA reported 747 671 314 741 497 861 371 618 468 674 691 EBIT 373 297 -84 328 80 419 23 306 265 364 386
Net income 202 102 -177 66 -232 104 -161 135 84 145 185
EBITDA margin clean 12.8% 12.6% 8.0% 11.4% 11.3% 12.5% 9.1% 10.7% 10.4% 10.8% 11.7% EBITDA margin reported 14.1% 11.4% 5.8% 11.3% 6.8% 13.6% 6.3% 10.2% 11.7% 11.7% 11.7%
EBIT margin 7.0% 5.1% -1.6% 5.0% 1.1% 6.6% 0.4% 5.0% 6.6% 6.3% 6.5%
CASH FLOW
in USD mn 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 9M14/15 2014/15E 2015/16E EBITDA clean 677 740 431 752 821 791 539 650 413 619 691 Adjustments/restructuring -82 -62 118 100 -23 71 -72 -84 -50 59 5
Interest -152 -181 -198 -309 -256 -299 -164 -162 -111 -188 -160 Tax -47 -70 -5 -9 -38 -50 -17 -1 -16 -35 -46 FFO (funds from operations) 396 427 346 534 504 513 286 403 236 455 490 Change in working capital 60 1 152 -5 -98 -102 -20 34 -97 -20 -22
Operating cash flow 456 428 498 529 406 411 266 437 139 435 468 Capex -442 -505 -176 -211 -268 -355 -552 -295 -163 -245 -290 Free operating cash flow 14 -77 322 318 138 56 -286 142 -24 190 178 Dividends -68 -73 -37 0 0 0 0 0 0 0 0
Acquisitions/disposals 78 11 -586 23 25 71 53 87 0 0 0 Share buybacks/issues 0 0 544 -3 0 0 0 0 0 0 0 FCF 24 -139 243 338 163 127 -233 229 -24 190 178
CAPITALIZATION
in USD mn 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 9M14/15 2014/15E 2015/16E Equity 1,816 1,605 1,794 1,896 1,478 1,525 1,144 1,044 1,120 1,098 1,245 Senior secured bank debt/bonds 499 493 1,966 1,682 1,986 2,093 1,971 1,917 1,857 1,777 1,668 Unsecured debt 2,165 2,211 1,418 1,334 753 531 628 558 412 608 608
Total debt 2,664 2,704 3,384 3,016 2,739 2,624 2,599 2,474 2,268 2,385 2,275 Cash 364 274 770 792 639 645 385 528 351 547 615 Net debt (total debt minus cash) 2,300 2,430 2,614 2,224 2,100 1,979 2,214 1,946 1,917 1,838 1,660
LEVERAGE RATIOS
Senior secured debt leverage 0.7x 0.7x 4.6x 2.2x 2.4x 2.6x 3.7x 2.9x 3.0x 2.9x 2.4x
Unsecured debt leverage 3.9x 3.7x 7.9x 4.0x 3.3x 3.3x 4.8x 3.8x 3.7x 3.9x 3.3x Net debt leverage (unadjusted) 3.4x 3.3x 6.1x 3.0x 2.6x 2.5x 4.1x 3.0x 3.1x 3.0x 2.4x Total debt leverage (unadjusted) 3.9x 3.7x 7.9x 4.0x 3.3x 3.3x 4.8x 3.8x 3.7x 3.9x 3.3x
DEBT ADJUSTMENTS
in USD mn 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 9M14/15 2014/15E 2015/16E For pensions 283 224 462 471 472 541 478 454 397 397 397 For operating leases 136 77 74 108 86 84 73 56 56 56 56 Others* 0 0 0 0 0 0 0 0 0 0 0
Total adjusted net debt leverage 3.4x 3.5x 6.6x 3.4x 3.0x 3.0x 4.6x 3.5x 3.6x 3.4x 3.0x Total adjusted FFO/net debt 18.3% 16.6% 11.7% 20.2% 19.8% 20.5% 11.1% 17.2% 16.5% 20.7% 24.1%
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BOND DOCUMENTATION – EUR 450MN SAPSJ 3.375% 04/22 BOND
Issuer Sappi Papier Holding GmbH Call/Put Call schedule On or after 1 April 2018: 101.688%; 1 April 2019: 100.844%; 1 April 2020 and thereafter: 100% Equity clawback On or prior to 1 April 2018: up to 35% @ 103.375% Make-whole clause Prior to 1 April 2018: Bund plus 50bp Change of control Put at 101%, if:
– sale, lease, transfer of all assets of the issuer/restricted subsidiaries – change in >50% of voting rights – adoption of plan to liquidate or dissolute of the parent
Guarantees Jointly and severally guaranteed by Sappi Ltd and some of its subsidiaries, together representing 50% of EBITDA and 68% of total assets in LTM 12M2014.
Security Secured on a first-priority basis by: – Land and PP&E located at production facilities in Gratkorn (Austria), Kirkniemi (Finland), Maastricht (Netherlands),
Skowhegan/Somerset and Cloquet (US) – Common shares, common stock or similar common equity interests of each of the subsidiary guarantors, Cloquet Terminal
Railroad Company Inc., Sappi Trading Pulp AG and Sappi Southern Africa (Pty) Ltd – Intercompany loan agreements or receivables under such loans that evidence financial indebtedness in excess of USD 25mn under
which the guarantors are creditors – Certain inventory of SD Warren Company and Sappi Cloquet LLC Limitations on the collateral include: – Total amount of debt that will be secured by real core assets, being any manufacturing facility, will be limited to 15% of
consolidated net tangible assets (ca. USD 330mn as of end-December 2014). Ranking Senior, ranking pari passu with: i) each of the guarantors' existing and future indebtedness not subordinated in right of payment to
the guarantees or preferred by law; and ii) collateral that secures the subsidiary guarantees on a first-priority security interest basis.
Certain covenants Limitation on debt Parent, Issuer and subsidiary may incur additional debt, if the parents LTM consolidated fixed charge coverage was at least 2.0x to 1.0x
Most important carve-outs/exceptions: – Refinancing of debt only permitted to be refinanced by the issuer, finance subsidiary or another guarantor – Permitted debt includes:
- EUR 1.3bn for the issuer, guarantor, finance subsidiary and any permitted obligor credit facility - Capital lease obligation etc. of up to USD 200mn - USD 50mn JV basket - up to ZAR 7.5bn of South African restricted (unsecured) debt - Qualified securitization financing - Acquired debt of a legal person that becomes a restricted subsidiary.
Limitation on sale of certain assets
Neither the parent, nor any restricted subsidiary will directly or indirectly consummate an asset sale (>USD 10mn), unless: – Consideration at least fair market value and at least 75% of asset sale is settled in cash or cash equivalents – Net proceeds of the sale may be applied within 360 days to:
- Repay notes and debt which is ranked pari passu (except RCF drawings below USD 200mn) - Acquire assets of permitted businesses or assets that are used or useful in a permitted business or make capex.
Most important carve-outs/exceptions: - Aggregate Permitted Investments amount to USD 350 mn
Limitation on restricted payments
Aggregate amount of restricted payments does not exceed the sum of: – 50% of the Consolidated Net Income of the Parent for the period from 29 June 2009 to the end of the Parent’s most recently
ended fiscal quarter at the time of such Restricted Payment, plus conversion into capital stock plus proceeds from the sale of restricted investments, plus 100% of any dividends or distributions received from an unrestricted subsidiary.
Most important carve-outs/exceptions: – General basket: USD 50mn. – Managers/employees equity repurchase basket (USD 5mn x 8 years) – Basket for dividends on Parent’s equity at 6% of market cap so long as the CLR is less than 4x pro forma
Limitations on transactions with affiliates
– Transactions exceeding USD 15mn require resolution of BOD with majority of disinterested directors, in addition, Transactions exceeding USD 25mn require opinion of independent financial advisor.
Fall-away/suspension of covenants Yes; Investment grade rating by Moody's and S&P Negative pledge No
Anti-layering No Step-up/down rating change No
Source: Offering memorandum, UniCredit Research
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Schmolz & Bickenbach (Hold) Recommendation We have a hold recommendation on STLNSW notes, which we expect to be called in the
short term. S+B’s 1H15 results show the impact of an increasingly difficult operating environment, while profitability and cash flow generation are still benefitting from the earnings improvement program and the working capital optimization project, respectively. The company is expected to achieve its medium-term leverage target of “below 2.5x” by FYE 2015. We note that the STLNSW bond is callable from May 2015 on and we would expect the company to make use of this option given the continuing favorable market conditions and the company’s significantly improved financial profile. In its 1Q15 conference call, the company already indicated the possibility of refinancing the existing bond by FYE 2015 and management reiterated that it is “observing and evaluating the market developments, very, very closely”.
Credit drivers Demand in customers’ main industries, e.g. automotive, engineering and US oil and gas
Success in implementing targeted EBITDA improvements
Net working capital improvements
Latest earnings review Schmolz + Bickenbach (S+B) reported solid 2Q15 results (though slightly below consensus), which were impacted by the deconsolidation of selected distribution entities in Germany, Belgium, the Netherlands and Austria after the proposed disposal end of March. The following results are therefore reported on the basis of continuing operations, excluding the selected distribution entities. The disposal was successfully concluded on 22 July with an EV of EUR 88.6mn and an equity value of EUR 56.6mn, EUR 48.6mn of which S+B received on 22 July, therefore not impacting the net debt position as of the end of 2Q15, despite the disposal having already led to impairment charges of EUR 126.7mn in the quarter.
Order intake decreased yoy to 476kt as of 30 June 2015 versus 539kt at 30 June 2014 and 497kt at FYE 2014. S+B reported 2Q15 revenues of EUR 723mn (-2.2% yoy), mainly on the back of lower sales volumes in the quarter (469,000 tons; -2.3% yoy). Adj. EBITDA of EUR 61.1mn declined 14% yoy due to lower volumes and FX effects. However, the adjusted EBITDA margin improved sequentially (8.4% in 2Q15 versus 7.4% in 1Q15, but declined yoy from 9.6% in 2Q14) supported by a lower average nickel price in 2Q15. We note that the company’s medium-term target EBITDA margin is in excess of 8%. Despite the usual seasonal W/C build- up in 1H15, operating cash developed quite positively and increased to EUR 52mn in 1H15 from EUR 7mn in 1H14, largely due to W/C improvements, which largely offset lower EBITDA and
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higher cash taxes. However, due to significantly higher investments (slag disposal site at Deutsche Edelstahlwerke GmbH and the acquisition of already rented real estate in Dusseldorf), FOCF was little changed yoy at EUR 26mn (versus EUR 24mn in 1H14). Reported net debt stood at EUR 638mn at end-June 2015 (vs. 634mn in 2Q14 and EUR 587mn at FYE 2014). Net leverage was at 2.7x versus 3.5x at 30 June 2014 and 2.2x at FYE 2014. As mentioned above, S+B received the initial EUR 48.6mn for the distribution business in July 2015, which will reduce net leverage to around 2.5x, the company’s medium-term leverage target.
Credit profile development S+B confirmed its FY15 outlook of achieving the lower end of the EBITDA guidance range of EUR 190-230mn (vs. FY14 EUR 253mn), including negative FX effects. The company maintained its capex guidance of EUR 150mn. In order to address CHF strength and the challenging market environment, S+B will step up its earnings improvement program and has launched a working capital optimization project that should already show benefits in the coming quarters. The company aims to reduce its net working capital by EUR 100mn (assuming stable raw material prices and stable exchange rates) until mid-2016 compared to the level as of YE14 (EUR 992mn). We note that net working capital already amounted to EUR 929mn in 1H15 versus EUR 1,069mn in 1H14, i.e. the reduction at the end of 1H15 was already higher than EUR 100mn. Still, we foresee the company being able to generate slightly positive FCF in FY15, which was also indicated during the 2Q15 conference call. Given a potentially lower EBITDA, further improvements in its credit profile should, however, be delayed until FY16.
The existing performance improvement program is based on more than 600 individual measures and is expected to result in an EBITDA improvement of EUR 230mn by FY16. This should mainly stem from cost savings (EUR 100mn, visible in FY14/15) and top-line measures (EUR 130mn, more back-end loaded and more difficult to achieve if market conditions weaken). From 2016 onwards (on average, over the economic cycle), S+B will target an adjusted EBITDA of more than EUR 300mn and an adjusted EBITDA margin of over 8%. Leverage is expected to be below 2.5x.
Company outlook / key model assumptions
S+B pointed out the following risks to its above-mentioned company outlook. 1. reduced global economic outlook by the World Bank, OECD and the IMF in 2Q15 versus 1Q15; 2. significantly reduced forecast for global steel consumption (mainly due to weakness in Asia/China), reflected in the expected growth rate for 2015 falling from 2.0% to 0.5%. 3. concerns about the development of industrial sectors in which S+B’s clients are active, such as the global automotive industry, the mechanical engineering sector as well as the ongoing problems in the oil & gas sector, mainly the fracking industry; and 4. appreciation of the CHF.
For FY15, we are a little more cautious regarding our FY15 outlook than the Bloomberg consensus forecast. We expect revenues of EUR 2.77bn compared to consensus expectation of EUR 2.83bn, while our adjusted EBITDA estimate is broadly in line with the consensus estimate at EUR 204mn. We expect the net leverage to decline to 2.5x by FYE 2014, mainly driven by the mentioned disposal. For FY16, we expect revenue and EBITDA to grow, although uncertainty is high.
THINGS TO WATCH
3Q15 results:12 November
Refinancing initiatives, with the bond callable since May 2015 at 107.406
Shift towards a more growth-oriented strategy
Stephan Haber, CFA (UniCredit Bank) +49 89 378-15192 [email protected]
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Schmolz + Bickenbach Analyst: Stephan Haber, CFA (UniCredit Bank), +49 89 378-15192 Corporate Ratings Rating Outlook Credit Profile Trend Recommendation Index Mcap B2/B+/-- STABLE/STABLE/-- Improving Hold --/iBoxx HY/-- CHF 0.7bn
Company description: Schmolz + Bickenbach (S+B) is a leading global provider of specialty long steel. The company is operating in all three sub- segments of the specialty long steel market: tool steel (13% of revenues in FY14), stainless long steel (36%) as well as quality and engineering steel (47%), offering services along the entire value chain from production to processing and distribution and services. It has leading market positions as the world's second-largest producer of tool steel, the world's second-largest producer of stainless long steel and Europe's second-largest producer of
quality and engineering steel (all by production tonnage). In FY14, the company generated 45% of its revenues in Germany, 6% in France, 9% in Italy, 19% in Other Europe, 2% in Switzerland, 14% in North America and 5% in Africa/Asia/Australia. S+B's largest shareholders are Liwet Holding AG (25.51%), S+B GmbH & Co. KG (15.17%) as well as Martin Häfner (10.17%), with the remainder (49.15%) free float. S+B GmbH & Co. KG, which is owned by seven individuals, holds its shares indirectly through various subsidiaries.
EBITDA BY QUARTER
CASH FLOW DEVELOPMENT
Strengths/Opportunities – Strong market position as a leading global provider of specialty long steel
solutions – High barriers to entry into the industry – Diverse customer base with about 30,000 customers worldwide – Strong relationships with customers – Less significant exposure to raw material price fluctuations given the industry-
wide surcharge system – Well-invested asset base following the completion of a substantial capex
program – Cash generation capabilities even in a market downturn – Benefits from a successful disposal of the low margin distribution businesses
Weaknesses/Threats – Highly cyclical business given the company's dependency on cyclical end-
markets such as the engineering (31% of FY14 sales) and automotive (29%) industries
– Generally rather low visibility in the business – Limited geographical diversification with a strong focus on Europe (82% of
revenues in FY14) – Very capital intensive business – Negative impact from the strength of the CHF
LIQUIDITY ANALYSIS
– As of 30 June 2015, S+B's liquidity rests on cash of EUR 56mn as well as about EUR 168mn headroom under its syndicated credit facility and EUR 91mn under its ABS facility (both mature in 04/19). In addition, S+B received EUR 48.6mn from disposal proceeds in July 2015. This compares to no major debt maturities until 2019 (reported short-term debt includes drawings under the ABS facility). Available liquidity is, hence – together with internally generated cash – sufficient to finance seasonal working capital (skewed towards 1H) and capex requirements.
– S+B has to adhere to financial covenants (including a leverage covenant, level not disclosed), which are tested quarterly, in its senior secured credit facilities as well as under its ABS facility and the KfW IPEX loan.
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CAPITALIZATION
Debt Instrument Ccy Interest Maturity First call Outst. (EUR mn) Net Lev. Moody's* S&P* SCHMOLZ + BICKENBACH Luxembourg SA
EUR 9.875% May-19 [email protected] 162 56% 30-50%
ABS financing program (ABCP)
Syndicated loan EUR Apr-19 276 Other debt EUR 47
Total senior 693 2.9x Cash and cash equivalents EUR -56 Total net debt 638 2.7x Adjusted EBITDA LTM EUR 240
CORPORATE STRUCTURE
SCHMOLZ+BICKENBACH AG (Switzerland)
SCHMOLZ+BICKENBACH Luxembourg S.A.
ABS Facility Senior Secured Credit Facilities
EUR 168mn 9.875% Senior Secured Notes
KfW Installment Loan
PROFIT AND LOSS (SCHMOLZ + BICKENBACH)
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1H14 2014 1H15 2015E 2016E Sales 4,247 4,092 2,052 3,119 3,943 3,581 3,277 1,730 3,338 1,489 2,766 2,821
EBITDA clean 417 234 -181 233 296 151 179 139 262 113 202 260 EBITDA exceptionals 12 13 -4 0 -1 29 37 3 9 0 7 0 EBITDA reported 404 221 -177 233 297 123 142 136 253 113 195 260 EBIT 314 125 -284 122 180 -14 18 76 131 49 75 138
Net income 189 63 -276 39 43 -163 -84 35 50 -118 21 60
EBITDA margin clean 9.8% 5.7% -8.8% 7.5% 7.5% 4.2% 5.5% 8.1% 7.8% 7.6% 7.3% 9.2% EBITDA margin reported 9.5% 5.4% -8.6% 7.5% 7.5% 3.4% 4.3% 7.9% 7.6% 7.6% 7.0% 9.2%
EBIT margin 7.4% 3.1% -13.8% 3.9% 4.6% -0.4% 0.5% 4.4% 3.9% 3.3% 2.7% 4.9%
CASH FLOW
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1H14 2014 1H15 2015E 2016E EBITDA clean 417 234 -181 233 296 151 179 139 262 113 202 260 Adjustments/restructuring -17 22 3 -21 42 -37 -37 18 -41 17 -2 -25
Interest -50 -66 -51 -127 -88 -61 -85 -30 -51 -17 -46 -46 Tax -70 -86 -21 -4 -6 -9 -17 -3 -14 -6 -15 -17 FFO (funds from operations) 267 90 -245 81 244 44 41 124 156 107 139 172 Change in working capital -152 103 462 -253 -25 65 45 -117 -28 -55 -2 5
Operating cash flow 115 193 217 -171 219 109 85 7 128 52 136 177 Capex -219 -220 -115 -117 -121 -137 -103 -31 -99 -77 -150 -110 Free operating cash flow -104 -28 102 -288 98 -28 -18 -24 29 -26 -14 67 Dividends -23 -24 -10 0 -16 -10 0 0 0 0 0 0
Acquisitions/disposals -134 -6 5 25 6 11 6 0 3 1 89 0 Share buybacks/issues 0 0 0 208 21 2 334 0 -4 -1 0 0 FCF -261 -57 96 -55 109 -25 322 -24 28 -26 75 67
CAPITALIZATION
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1H14 2014 1H15 2015E 2016E Equity 730 819 527 796 844 633 890 901 901 815 921 981 Total debt 991 1,035 1,091 981 961 953 679 699 659 693 584 517 Cash 40 47 174 54 101 51 68 66 72 56 72 72
Net debt (total debt minus cash) 951 988 917 927 860 903 610 634 587 638 512 445
LEVERAGE RATIOS
Net debt leverage (unadjusted) 2.3x 4.2x -5.1x 4.0x 2.9x 6.0x 3.4x 2.9x 2.2x 2.7x 2.5x 1.7x Total debt leverage (unadjusted) 2.4x 4.4x -6.0x 4.2x 3.2x 6.3x 3.8x 3.1x 2.5x 3.0x 2.9x 2.0x
DEBT ADJUSTMENTS
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1H14 2014 1H15 2015E 2016E For pensions 136 148 161 195 223 283 244 257 333 325 333 333 For operating leases 64 77 73 72 59 60 52 52 43 43 43 43 Others* 0 0 0 0 0 0 0 0 0 0 0 0
Total adjusted net debt leverage 2.7x 4.9x -7.8x 4.5x 3.4x 6.5x 4.3x 3.7x 3.2x 3.6x 4.0x 3.0x Total adjusted FFO/net debt 24.0% 8.4% -20.1% 8.1% 22.9% 5.0% 6.1% 14.2% 17.7% 15.3% 17.3% 22.7%
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BOND DOCUMENTATION – STLNSW 9.875% 05/19 – SENIOR SECURED NOTES
Issuer SCHMOLZ+BICKENBACH Luxembourg S.A. Call/Put Call schedule On or after 15 May 2015: @ 107.406%, 2016: @ 104.938%, 2017: @ 102.469%, 2018 and thereafter: @ 100% Equity clawback Used Make-whole clause Prior to 15 May 2015, Bund plus 50bp Change of control 101% (if more than 33.33% of the total voting power and more than the permitted holders). Guarantees The Notes will be guaranteed by Parent and each Restricted Subsidiary of the Parent which guarantees the Senior
Credit Facilities and the IPEX Loan. The Subsidiary Guarantors are S+B Edelstahl GmbH (Germany), Deutsche Edelstahlwerke GmbH (Germany), Günther+Schramm GmbH (Germany), S+B Distributions GmbH (Germany), Ugitech S.A. (France), Swiss Steel AG (Switzerland), Steeltec AG (Switzerland), A. Finkl & SonsCo. (United States) and S+B USA, Inc. (United States). Issuer and guarantors represented 80.8% of sales, 87.8% of EBITDA and 79.5% of total assets as of 31 December 2011).
Security First-ranking liens over (i) all of the Capital Stock of the Issuer and the Subsidiary Guarantors, (ii) certain bank accounts of the Issuer, (iii) certain rights and benefits under insurance contracts relating to receivables and inventory of certain Guarantors, (iv) certain trade receivables and derivatives and (v) certain intercompany receivables. Second- ranking liens over certain bank accounts of the Issuer and the Guarantors that are pledged under the ABS Facility.
Ranking Pari passu with all existing and future debt of the issuer (including the senior guarantee given by the issuer under the Senior Credit Facilities and the IPEX loan). Effectively subordinated to any existing and future debt of the issuer that is secured by property or assets that do not secure the notes, to the extent of the value of the property and assets securing such debt, and to the indebtedness of non-guarantor subsidiaries.
Certain covenants Limitation on debt Fixed charge coverage ratio of at least 2.5x
Most important carve-outs/exceptions: – Debt under the Credit Facility up to EUR 600mn less cash proceeds from disposals – Debt under export finance loans and Förderkredite up to EUR 100mn – Hedging obligations – CLO and purchase money obligations up to EUR 20mn – Debt of any restricted subsidiary under a Receivables Facility up to EUR 400mn – General basket: EUR 50mn.
Limitation on sale of certain assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, cash equivalents (i.e. including assumed liabilities/securities/received assets) and is applied to debt reduction within 365 days. Excess proceeds exceeding EUR 20mn used to redeem notes and pari passu debt at par. Permitted investments include: investments in joint ventures up to EUR 25mn and a general basket of up to EUR 20mn.
Limitation on restricted payments Aggregate amount of restricted payments may not exceed sum of the following: – 50% of consolidated net income (minus 100% of such negative amount), – Capital contributions/proceeds from the issue of capital stock (other than disqualified stock), Most important carve-outs/exceptions: – Purchase of capital stock in connection with obligations under employee stock option agreements up to EUR 3mn p.a. – General basket: up to EUR 20mn.
Limitations on transactions with affiliates De minimus threshold: EUR 2mn Board resolution if transaction greater than EUR 5mn (approval by disinterested directors required otherwise fairness opinion). Fairness opinion if transaction greater than EUR 20mn.
Limitation on sale and leaseback No Fall-away/suspension covenants Yes, if by both agencies and no default. Negative pledge Yes, with the exception of permitted liens (including liens not exceeding EUR 20mn) and permitted collateral liens.
Permitted debt may be secured as long as the consolidated secured debt ratio is less than 3.0x. Anti-layering No
Source: Offering memorandum, UniCredit Research
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Stora Enso (Sell) Recommendation We keep our sell recommendation on Stora Enso. The group’s outstanding EUR-
denominated STERV 5% 3/18 and STERV 5.5% 3/19 notes trade expensive vs. stronger pure-play packaging peers (e.g. SKGID), in our view. Although material spread widening of the bonds is not likely due to Nordic support and despite potential new EUR-denominated issuance (the company met investors in June), we expect STERV cash bonds to underperform peers in 4Q15/2016 (STERV 2018 and 2019 bond spreads are unchanged YTD vs. FYE 2014).
Credit drivers Current transformation of the group with continued restructuring of European graphic paper capacity and expansion of Biomaterials and consumer packaging activities in Asia
Limited capacity for deleveraging due to large capex projects in 2015/16
Execution risks with regard to sizeable growth investment and continued structural demand pressure for European paper operations
Volume development per product (yoy change in deliveries) Operational EBITDA margin per segment
Latest earnings review Stora Enso reported 2Q15 results below expectations. Reported sales of EUR 2.56bn improved 3% qoq (slightly down yoy due to weaker price/mix), in line with the company’s outlook for a sequential improvement in 2Q15 and supported by overall higher volumes, particularly of pulp, corrugated packaging and board. However, operational EBITDA declined 6.5% qoq to EUR 318mn (12.4% margin; minus 120bp qoq), whereas the company had anticipated a sequentially stable result in 2Q15. The main burden stemmed from production issues and the Guangxi start-up costs in the division Consumer Board and price-related lower profitability in Paper, which was not fully offset by positive FX effects. Despite lower earnings, operating cash flow generation was solid (EUR 419mn in 2Q15 vs. EUR 271mn last year) but was used for increased cap

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