Stora Enso Oyj
Primary Credit Analyst:
Gustav Liedgren, Stockholm (46) 8-440-5916; [email protected]
Secondary Contact:
Terence O Smiyan, London (44) 20-7176-6304; [email protected]
Recovery Analyst:
Tuomas E Ekholm, CFA, Frankfurt (49) 69-33-999-123; [email protected]
Research Assistant:
Akshat D Adukia, Mumbai
Table Of Contents
Rationale
Outlook
Standard & Poor's Base-Case Scenario
Company Description
Business Risk
Financial Risk
Liquidity
Other Modifiers
Ratings Score Snapshot
Recovery Analysis
Reconciliation
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Table Of Contents (cont.)
Related Criteria And Research
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Business Risk: FAIR
CORPORATE CREDIT RATING
Vulnerable
Excellent
bb
bb
bb
BB/Stable/B
Financial Risk: SIGNIFICANT
Highly leveraged
Minimal
Anchor
Modifiers
Group/Gov't
Nordic Regional Scale
--/--/K-4
Rationale
Business Risk: Fair
Financial Risk: Significant
• Exposure to the highly cyclical forest and paper
products industry, characterized by intense
competition, recurring periods of overcapacity, high
sensitivity to raw material costs, and poor pricing
power.
• Material exposure to graphic paper (newsprint,
magazine, and fine paper represents around 40% of
sales), which is facing a structural decline in
demand.
• Significant exposure to mature European
economies.
• Strong and improving position in the relatively
attractive consumer packaging segment.
• Well-diversified asset and product portfolio and
strong geographic reach.
• Cyclical operational cash flow generation.
• Highly capital-intensive operations and aggressive
expansion investments.
• Ongoing dividend payments during period of high
capital expenditure (capex).
• "Strong" liquidity.
• Ability and willingness to reduce capex to preserve
cash.
Outlook: Stable
The stable outlook on Finnish forest and paper products group Stora Enso Oyj (Stora Enso) reflects our view that Stora
Enso's profitability will gradually improve, leading to broadly stable credit metrics. We forecast that Stora Enso's
Standard & Poor's-adjusted ratio of funds from operations (FFO) to debt will be about 20%, and adjusted debt to
EBITDA less than 4x in 2015, levels we regard as commensurate with the 'BB' long-term rating.
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Downside scenario
We could lower the long-term rating if weakening market conditions, combined with higher-than-expected
investments, led to a deterioration of Stora Enso's credit metrics. For example, we would consider ratios of FFO to
debt of about 15% and debt to EBITDA of more than 4x, for an extended period of time and with no scope for
improvement, as incommensurate with the 'BB' long-term rating. Furthermore, we think the group's credit quality
could weaken if its financial policy became more aggressive. This could occur as a result of large, debt-financed
acquisitions or exceptionally shareholder-friendly measures, although we think these are currently unlikely.
Upside scenario
An upgrade is highly unlikely in the coming 12 months, in our view, due to still-difficult European paper markets and
the group's investment ambitions. Over the longer term, we could raise the long-term rating if we saw substantial and
sustained improvements in Stora Enso's profitability and cash flow generation to the extent that we could revise our
assessment of the group's business risk profile upward, or if FFO to debt rose to and remained above 30%.
Standard & Poor's Base-Case Scenario
Assumptions
• Economic recovery to remain fragile in 2015 and
2016.
• Revenues to grow in the low-single-digit range in
2015 and 2016, as volumes and prices improve in
the pulp, wood, and packaging divisions, while the
paper division remains weak.
• EBITDA margin to gradually improve given the
ongoing cost-cutting measures and growth
investments.
• Capex of €780 million-€840 million in 2015.
• Stable dividend payouts and no large cash outlays
on mergers and acquisitions.
Key Metrics
2014A 2015E 2016E
EBITDA margin (%)*
Debt/EBITDA (x)*
FFO/debt (%)*
12.5
13-14
13-15
3.8
3-3.5
3-3.5
19.3
20-23
24-27
*Fully Standard & Poor's-adjusted. A--Actual.
E--Estimate.
Company Description
With sales of €10.2 billion in 2014, Stora Enso is among the largest diversified forest product companies globally. It
holds leading positions in newsprint, magazine paper, fine paper, and consumer and industrial packaging board.
Operations also include specialty paper, pulp production--primarily used in the group's own mills--and wood supply
and wood products.
The group has production facilities in several countries, including Finland, Sweden, Germany, Belgium, Brazil,
Uruguay, and China. Production and sales are focused on Europe, but the group's strategy is to target growth in
emerging markets such as China and South America.
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Stora Enso is domiciled in Finland, and is listed on the Helsinki and Stockholm stock exchanges. The Finnish state
holds 25% of the voting rights, but we do not factor state support into the ratings.
Business Risk: Fair
Our assessment of Stora Enso's business risk profile reflects the group's significant exposure to the highly cyclical
European pulp and paper markets, characterized by demand fluctuations resulting from economic activity, recurring
periods of overcapacity, high sensitivity to the cost of raw materials, and limited pass-through of costs because of poor
pricing power. Stora Enso is also materially exposed to graphic paper (about 40% of group sales and around 21% of
operational EBIT in 2014), which is cyclical and in structural decline due to ongoing migration to electronic media.
Despite recent capacity closures in Europe, there is still overcapacity in certain paper grades, which in our view makes
sustained price increases difficult to implement. In addition, we consider Stora Enso's large proportion of sales to
low-growth European markets (about 75% in 2014) a further constraint.
These weaknesses are mitigated by Stora Enso's strong positions within the more stable packaging materials market,
and its large size and scope as one of the world's largest forest and paper products companies, with a well-diversified
asset and product portfolio. A further relative strength is management's clear strategy to improve the business portfolio
through investments in markets and product segments with attractive growth opportunities, such as consumer
packaging in Asia and plantation-based pulp in South America, which should lead to an improved product mix with
around 30% of sales coming from paper once the investments have been ramped up. Although we acknowledge that
there are significant implementation risks with the investments Stora Enso is currently undertaking, we think that its
business risk profile could improve in the next three-to-four years if investments are realized as planned. We also think
that the ongoing tough cost-cutting have the potential to improve efficiency and competitiveness in Stora Enso's
mature business segments.
S&P Base-Case Operating Scenario
• Graphic paper demand to continue its downward trend by falling around 3%-5% annually over 2015-2016 in Europe
due to digital substitution. At the same time, we expect demand for Stora Enso's packaging products to remain
robust in 2015. The paperboard mill in China, which is scheduled to come online in 2016, will add to volume
growth.
• Pulp volumes to grow significantly in 2015 when the Montes del Plata pulp mill in Uruguay operates at full capacity,
with stable volume growth thereafter.
• The pricing environment to remain largely stable for paper and paperboard in Europe and also for both softwood
and hardwood pulp.
Peer comparison
Stora Enso's peer group consists mainly of other large integrated forest and paper products companies. Its "fair"
business risk profile is on the same level as that of Sappi Ltd., and weaker than the "satisfactory" business risk profiles
of Smurfit Kappa Group PLC, International Paper Co., and UPM-Kymmene Corp.
Smurfit Kappa and International Paper have more favorable product and geographic portfolios than Stora Enso, as the
vast majority of their sales derive from paper-based packaging and they have a larger exposure to emerging markets
than Stora Enso. A large part of UPM-Kymmene's earnings derive from the relatively stable energy segment and very
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profitable pulp operations, which leads to more stable operations over the cycle. Stora Enso's "significant" financial risk
profile is on the same level as that of Smurfit Kappa and UPM-Kymmene, although Stora Enso's credit metrics have
recently been weaker than those of UPM-Kymmene. International Paper has stronger and Sappi weaker credit metrics
than Stora Enso, resulting in overall higher and lower ratings than Stora Enso, respectively.
Table 1
Stora Enso Oyj Peer Comparison
Stora Enso Oyj
UPM-Kymmene
Corp.
Sappi Ltd.
Smurfit Kappa Group
PLC
International Paper
Co.
BB/Stable/B
BB+/Stable/B
BB-/Stable/B
BB+/Stable/--
BBB/Stable/NR
Business risk profile
Fair
Satisfactory
Fair
Satisfactory
Satisfactory
Financial risk profile
Significant
Significant
Aggressive
Significant
Intermediate
bb
bb+
bb-
bb+
bbb
--
--
--
--
--
Rating as of March 26, 2015
Anchor
Modifiers
--Average of past three fiscal years-(Mil. €)
Revenues
10,530.3
10,174.7
4,703.0
7,791.7
20,576.1
EBITDA
1,219.2
1,202.7
589.0
1,123.7
3,043.5
Funds from operations (FFO)
918.4
985.1
393.9
734.8
2,446.7
Net income from cont. oper.
175.3
(91.7)
17.8
223.0
672.4
Cash flow from operations
932.6
1,079.1
310.3
701.1
2,367.0
Capital expenditures
679.7
362.0
304.3
377.0
995.9
Free operating cash flow
252.9
717.1
5.9
324.1
1,371.1
Discretionary cash flow
12.6
400.1
5.9
242.8
946.0
250.3
100.0
98.3
97.5
384.9
Debt
4,672.2
3,936.2
2,108.7
3,763.9
8,871.0
Equity
5,457.3
7,497.5
949.5
2,464.7
5,319.2
EBITDA margin (%)
11.6
11.8
12.5
14.4
14.8
Return on capital (%)
6.3
4.6
7.6
10.7
8.6
EBITDA interest coverage
(x)
4.6
11.0
3.2
3.8
4.3
FFO cash int. cov. (X)
5.7
18.1
4.1
4.4
5.4
Debt/EBITDA (x)
3.8
3.3
3.6
3.3
2.9
FFO/debt (%)
19.7
25.0
18.7
19.5
27.9
Cash flow from
operations/debt (%)
20.0
27.4
14.7
18.6
26.7
Free operating cash
flow/debt (%)
5.4
18.2
0.2
8.6
15.5
Discretionary cash flow/debt
(%)
0.3
10.2
0.2
6.5
10.7
Cash and short-term
investments
Adjusted ratios
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Financial Risk : Significant
Stora Enso's financial risk profile is constrained by its highly cyclical cash flow generation, stemming from industry
cycles and working capital use; and by its highly capital-intensive operations, with long lead times for new
investments. The group is currently pursuing an aggressive investment plan to reposition itself towards growth
segments within the forest products sector. Its pulp mill in Uruguay commenced operations in 2014, while its
packaging mill in China is due to come online in 2016. Hence we believe that Stora Enso's credit metrics could
improve from 2016, given the increased earnings and cash flow generation potential of the group's current investment
programs. However, delays or cost overruns relating to the investment programs, coupled with worsening operating
conditions in the existing divisions, could put additional pressure on the credit metrics, and, in turn, on the ratings.
These weaknesses are offset by Stora Enso's willingness to reduce capex, evident from its decision in 2013 to construct
its integrated packaging mill in Guangxi in China in two stages, thereby reducing investments in the near term. We
believe that the group's prefunding of investments, diverse funding base, and prudent liquidity management further
mitigate its relatively high debt leverage and at times weak cash flow generation.
S&P Base-Case Cash Flow And Capital Structure Scenario
• Capex of around €780 million-€840 million, in line with management guidance.
• Stable dividend payments until at least 2016.
• Possible additional working capital inflows if more paper machines are closed or sold.
Financial summary
Table 2
Stora Enso Oyj Financial Summary
--Fiscal year ended Dec. 31-(Mil. €)
Rating history
2014
2013
2012
2011
2010
BB/Stable/B BB/Stable/B BB/Negative/B BB/Stable/B BB/Positive/B
Revenues
10,213.0
10,563.0
10,815.0
10,964.9
10,296.9
EBITDA
1,272.5
1,073.0
1,312.1
1,350.5
1,272.8
941.9
778.5
1,034.9
1,115.9
1,033.0
99.0
(53.0)
480.0
339.7
766.0
757.8
1,036.1
1,003.9
746.0
837.4
Capital expenditures
770.0
717.0
552.0
407.7
388.9
Free operating cash flow
(12.2)
319.1
451.9
338.3
448.5
Discretionary cash flow
(249.2)
75.1
211.9
137.5
289.6
250.0
251.0
250.0
250.0
250.0
Debt
4,867.7
4,395.5
4,753.3
4,289.2
3,835.5
Equity
5,237.0
5,273.0
5,862.0
5,959.3
6,253.9
EBITDA margin (%)
12.5
10.2
12.1
12.3
12.4
Return on capital (%)
7.6
4.8
6.6
8.3
8.2
EBITDA interest coverage (x)
4.6
3.8
5.5
7.2
8.5
FFO cash int. cov. (x)
5.6
4.6
7.2
9.9
9.5
Funds from operations (FFO)
Net income from continuing operations
Cash flow from operations
Cash and short-term investments
Adjusted ratios
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Table 2
Stora Enso Oyj Financial Summary (cont.)
Debt/EBITDA (x)
3.8
4.1
3.6
3.2
3.0
FFO/debt (%)
19.3
17.7
21.8
26.0
26.9
Cash flow from operations/debt (%)
15.6
23.6
21.1
17.4
21.8
Free operating cash flow/debt (%)
(0.3)
7.3
9.5
7.9
11.7
Discretionary cash flow/debt (%)
(5.1)
1.7
4.5
3.2
7.6
N.M. - Not Meaningful.
Liquidity : Strong
The short-term rating is 'B'. We assess Stora Enso's liquidity as "strong," as defined in our criteria. We expect the
group's sources of liquidity to substantially exceed the uses over the 12-18 months from Jan. 1, 2015. Furthermore, the
group's loan documentation is free from restrictive financial covenants; it has a solid relationship with its banks; and it
has demonstrated access to the debt capital markets. The group also refinanced its €700 million revolving credit
facility (RCF) in 2014, extending the maturity date to January 2018 from January 2015 previously.
Principal Liquidity Sources
• An available cash balance of about €1.4 billion as of Dec. 31, 2014;
• Access to an undrawn committed RCF of €700 million, maturing in January 2018 (free of financial covenants that
would restrict Stora Enso from drawing on the facility), and $275 million available under its $460 million funding
facility for the Guangxi investment; and
• Our forecast of unadjusted FFO of €1.1 billion-€1.2 billion in 2015 and 2016.
Principal Liquidity Uses
•
•
•
•
Contractual debt maturities of about €1.1 billion in 2015 and about €0.7 billion in 2016;
Capex of €780 million-€840 million in 2015, as indicated by management;
Estimated dividends of about €240 million; and
Limited working capital and acquisition outflows.
Debt maturities (Mil. €)
2015: 1,292
2016: 854
2017: 772
2018: 826
2019: 726
Thereafter
1,171
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Other Modifiers
The modifiers do not have any impact on the rating.
Ratings Score Snapshot
Corporate Credit Rating
BB/Stable/B
Business risk: Fair
• Country risk: Low
• Industry risk: Moderately high
• Competitive position: Fair
Financial risk: Significant
• Cash flow/Leverage: Significant
Anchor: bb
Modifiers
• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Financial policy: Neutral (no impact)
• Liquidity: Strong (no impact)
• Management and governance: Satisfactory (no impact)
• Comparable rating analysis: Neutral (no impact)
Recovery Analysis
Key analytical factors
• The issue rating on Stora Enso's senior unsecured debt is 'BB', with a recovery rating of '4' indicating our
expectation of average recovery (30%-50%) in an event of a payment default. Recovery expectations are at the
higher end of the 30%-50% range.
• Our issue and recovery ratings on the unsecured debt are supported by our valuation of the company as a
going-concern, driven by its leading market positions, modern and efficient asset base, broad product and
geographic diversity, and significant vertical integration, as well as Finland's favourable insolvency regime.
• The recovery rating is constrained by the unsecured nature of the notes and the substantial priority liabilities and
volume of unsecured debt in the waterfall.
• In our hypothetical scenario, we believe that Stora Enso would face pressure on profitability resulting from
oversupply, pressure on prices, and input cost volatility.
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Simulated default assumptions
•
•
•
•
Simulated year of default: 2018
EBITDA at default: €645 million
Implied enterprise value multiple: 6.0x
Jurisdiction: Finland
Simplified waterfall
• Stressed enterprise value at default: €3.9 billion
• Administrative costs: about €310 million
• Net value available to creditors: €3.56 billion
• Priority claims: €1.6 billion*
• Unsecured debt claims: €4.6 billion **
• --Recovery expectation 30%-50% (higher end of range)
*Includes financial lease, factoring program and pension related liabilities considered as priority, as well as bank debt
at subsidiaries structurally senior to parent company unsecured debt.
**Includes six months' prepetition interest. Revolving credit facility is assumed 85% drawn at default.
Reconciliation
Table 3
Reconciliation Of Stora Enso Oyj Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. €)
--Fiscal year ended Dec. 31, 2014-Stora Enso Oyj
reported amounts
Shareholders'
Debt
equity Revenues EBITDA
Reported
Operating Interest
income expense
Cash flow
from Dividends
Capital
EBITDA operations
paid expenditures
4,894
5,070
10,213
1,280
400
211
1,280
888
237
787
Interest expense
(reported)
--
--
--
--
--
--
(211)
--
--
--
Interest income
(reported)
--
--
--
--
--
--
22
--
--
--
Current tax expense
(reported)
--
--
--
--
--
--
(79)
--
--
--
Trade receivables
securitizations
170
--
--
--
--
5
(5)
(145)
--
--
Operating leases
550
--
--
76
32
32
43
43
--
--
Postretirement
benefit
obligations/deferred
compensation
429
--
--
(7)
(7)
11
(16)
(12)
--
--
(1,196)
--
--
--
--
--
--
--
--
--
--
--
--
--
--
17
(17)
(17)
--
(17)
Standard & Poor's
adjustments
Surplus cash
Capitalized interest
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Table 3
Reconciliation Of Stora Enso Oyj Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. €) (cont.)
Share-based
compensation
expense
--
--
--
6
--
--
6
--
--
--
Dividends received
from equity
investments
--
--
--
19
--
--
19
--
--
--
Non-operating
income (expense)
--
--
--
--
22
--
--
--
--
--
Non-controlling
Interest/Minority
interest
--
167
--
--
--
--
--
--
--
--
Debt - Contingent
considerations
21
--
--
--
--
--
--
--
--
--
EBITDA - Income
(expense) of
unconsolidated
companies
--
--
--
(87)
(87)
--
(87)
--
--
--
EBITDA Gain/(Loss) on
disposals of PP&E
--
--
--
(14)
(14)
--
(14)
--
--
--
D&A - Asset
Valuation
gains/(losses)
--
--
--
--
114
--
--
--
--
--
D&A - Impairment
charges/(reversals)
--
--
--
--
228
--
--
--
--
--
EBIT - Income
(expense) of
unconsolidated
companies
--
--
--
--
87
--
--
--
--
--
(26)
167
-
(8)
375
65
(338)
(130)
-
(17)
Total adjustments
Standard & Poor's
adjusted amounts
Debt
Adjusted
4,868
Equity Revenues EBITDA
5,237
10,213
1,273
Funds Cash flow
Interest
from
from Dividends
Capital
EBIT expense operations operations
paid expenditures
775
276
942
758
237
Related Criteria And Research
Related Criteria
•
•
•
•
•
•
•
•
Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
Key Credit Factors For The Forest And Paper Products Industry, Feb. 12, 2014
Corporate Methodology, Nov. 19, 2013
Methodology: Industry Risk, Nov. 19, 2013
Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
2008 Corporate Criteria: Rating Each Issue, April 15, 2008
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Related Research
• Top 10 Global Investor Questions For 2015: Forest and Paper Products Sector, Nov. 17, 2014
Business And Financial Risk Matrix
Financial Risk Profile
Business Risk Profile
Minimal
Modest
Intermediate
Significant
Aggressive
Highly leveraged
Excellent
aaa/aa+
aa
a+/a
a-
bbb
bbb-/bb+
aa/aa-
a+/a
a-/bbb+
bbb
bb+
bb
a/a-
bbb+
bbb/bbb-
bbb-/bb+
bb
b+
bb-
b
Strong
Satisfactory
Fair
bbb/bbb-
bbb-
bb+
bb
Weak
bb+
bb+
bb
bb-
b+
b/b-
Vulnerable
bb-
bb-
bb-/b+
b+
b
b-
Ratings Detail (As Of March 27, 2015)
Stora Enso Oyj
Corporate Credit Rating
Nordic Regional Scale
Senior Unsecured
BB/Stable/B
--/--/K-4
BB
Corporate Credit Ratings History
11-Sep-2013
BB/Stable/B
25-Oct-2012
BB/Negative/B
22-Nov-2011
BB/Stable/B
15-Dec-2010
BB/Positive/B
11-Nov-2008
Nordic Regional Scale
11-Nov-2008
--/--/K-4
--/--/K-3
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable
across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and
debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.
Additional Contact:
Industrial Ratings Europe; [email protected]
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