South Africa-Based Forest Products Group Sappi's Senior Unsecured Debt Rated 'BB'


JOHANNESBURG (S&P Global Ratings) March 13, 2019--S&P Global Ratings today 
assigned its 'BB' issue rating to the 3.125% €450 million senior unsecured 
notes, due 2026, issued by Sappi Papier Holding GmbH and guaranteed by South 
Africa-based pulp and paper manufacturer Sappi Ltd. The notes rank pari passu 
with all of the company's other unsecured, unsubordinated debt outstanding. As 
such, the recovery rating on the notes is '3', indicating our expectation of 
meaningful recovery (50%-70%; rounded estimate: 55%) in the event of a 
default. All of our other ratings on Sappi Ltd. and Sappi Papier Holdings GmbH 
remain unchanged.

The company intends to use the proceeds from these notes to redeem its 3.375% 
€450 million callable senior secured notes due 2022. We expect the company to 
exercise its call option on these notes shortly after the issuance of the new 
notes due in 2026, and to redeem the 2022 notes after the expiration of the 
30-day call-option notice period. 

The new transaction does not change our view of the company's credit quality. 
This is because the transaction is largely leverage neutral, and we continue 
to expect Sappi will maintain S&P Global Ratings-adjusted credit metrics close 
to current levels, with adjusted funds from operations (FFO) to debt of 
approximately 30% and adjusted debt to EBITDA of approximately 2.5x. We factor 
into our assumptions the combination of neutral market conditions and higher 
EBITDA margins. Increased demands on cash stemming from higher expansionary 
capital expenditures and dividends--which led to negative free operating cash 
flow (FOCF) and discretionary cash flow in the fiscal year that ended Sept 30, 
2018--may persist in fiscal 2019.

Our analysis of Sappi (BB/Stable/B) reflects the company's large scale and 
geographic diversification, and its increasing exposure to specialty and 
packaging paper to balance the structural decline in demand for coated 
wood-free paper (61% of Sappi's EBITDA in fiscal 2018). The company's growing 
presence in specialty and packaging paper, alongside its existing position and 
planned capacity increases in dissolving wood pulp (DWP) production, will 
likely drive revenue growth and margin expansion in the medium term. In our 
view, positive momentum in product diversification and margins partly 
mitigates risk associated with the group's exposure to the volatile and 
cyclical forest and paper products industry, in which it is primarily a price 
taker. Furthermore, Sappi's South African operations are exposed to volatility 
in the South African rand, and there is customer concentration in the DWP 
segment. 

We also take into account Sappi's credit measures, including S&P Global 
Ratings-adjusted debt to EBITDA of about 2.5x at Sept. 30, 2018. Management 
has stated that it will maintain reported net debt to EBITDA below 2.0x as a 
benchmark, although the ratio could temporarily exceed this level during 
periods of marked expansionary investment. This, together with solid operating 
performance and predictable dividend policy, underpin our view that Sappi will 
maintain adjusted debt to EBITDA of about 2.0x-2.5x throughout fiscal 
2019-fiscal 2020. 

For our complete issuer credit rating rationale, as well as details on our 
recovery rating on the group's debt, see "Sappi Ltd.," published Jan. 28, 
2019.

We will withdraw our issue ratings on the 3.375% €450 million callable 2022 
senior secured notes on closing of the transaction and redemption of the 
called notes.
We work across the world

From London to San Francisco, to our home base in (Saint Helier) Jersey, we’re looking for extraordinary and creative scientists to help us drive the field forward.

AC Investment Inc. currently does not act as an equities executing broker or route orders containing equities securities. If AC Invest’s business model were to change and it begins routing non-directed orders in NMS securities, it will comply with the disclosure requirement of Rule 606.

77 Massachusetts Avenue Cambridge, MA 02139 617-253-1000 pr@ademcetinkaya.com