(The following statement was released by the rating agency)
Jan 22 -
Summary analysis -- Mondi Group ----------------------------------- 17-Jan-2013
CREDIT RATING: BBB-/Stable/-- Country: South Africa
Primary SIC: Converted paper
Credit Rating History:
Local currency Foreign currency
03-Oct-2011 BBB-/-- BBB-/--
16-Mar-2010 BB+/-- BB+/--
The ratings on South Africa-headquartered paper and packaging producer Mondi Group (Mondi) reflect Standard & Poor's Ratings Services' view of the group's "satisfactory" business risk profile and "intermediate" financial risk profile.
Mondi's key business strengths include its low cost position, well-invested asset base and leading position in emerging markets. Mondi's meaningful geographic and end-market diversity has been further strengthened by the acquisition of plastic packaging manufacturer Nordenia International AG in October 2012. Relative weaknesses are Mondi's exposure to the competitive and very cyclical paper market, volatile input costs and currency exchange rates, and expected continued structural demand decline in paper over the long term.
The rating also reflects Mondi's "intermediate" financial risk profile, "strong" liquidity profile, and supportive financial policies.
We note Mondi's commitment to manage dividends, investments, and acquisitions at levels that do not put its investment-grade rating at risk. Accordingly, we believe that Mondi will seek to maintain its operating and financial performance, on a sustainable basis, at levels we consider commensurate with an investment-grade rating, even in a scenario of economic weakness in its main markets of Western and Eastern Europe, Russia, and South Africa.
S&P base-case operating scenario
In our 2013 base-case credit scenario, we assume that as macroeconomic constraints continue to drive soft demand, market conditions will remain relatively weak. We forecast low single-digit sales growth (about 3%) mainly driven by the integration of Nordenia. We forecast 2013 Standard & Poor's-adjusted EBITDA margins of about 15%, in line with our expectations for full year 2012 results (vs. about 16% in 2011). We anticipate that productivity gains and increased volumes from Mondi's modernization and capacity expansion projects in Russia and Poland could lift margins back to 2011 levels over the medium term.
S&P base-case cash flow and capital-structure scenario
In our 2013 base-case credit scenario, we anticipate Standard & Poor's-adjusted debt to EBITDA of about 2.5x as of Dec. 31, 2012, improving to nearer 2.0x as of Dec. 31, 2013. The significant increase in debt leverage from a low of 1.4x in 2011, is mainly driven by the debt funded acquisitions in 2012. Similarly, we forecast adjusted funds from operations (FFO) to debt in the region of 35% in 2012 and around 40% in 2013, compared with 67% in 2011. We note that Mondi's improved performance in 2011 provided the group with a cushion to withstand weakening operating conditions in the near term, due to industry cyclicality, macroeconomic pressure, and input cost inflation.
For 2013, we forecast higher capex than in 2012, in the range of EUR400 million-EUR500 million, as the group continues to invest in its energy assets. In particular, Mondi will invest EUR128 million on a new recovery boiler at its Ruzomberok mill in Slovakia. We anticipate that working capital levels will remain approximately in the group's targeted range of 10%-12% of turnover. We forecast acquisition spending to reduce significantly in 2013, following exceptionally high spend in 2012.
We assess Mondi's liquidity as "strong" under our criteria. We forecast that the group's liquidity sources will exceed uses by more than 1.5x in 2013 and by more than 1.0x in 2014 (as defined by our criteria). We anticipate that the group will maintain positive liquidity sources even if EBITDA were to decline by 15%.
For 2013, we forecast sources of liquidity to include:
-- More than EUR650 million in undrawn committed credit facilities and cash on balance sheet. In addition, we assume that Mondi will continue to successfully refinance its 12-month bilateral South African facilities (of more than EUR100 million).
-- Our forecast of funds from operations (FFO) of more than EUR800 million in 2013.
We forecast that major uses of liquidity in 2013 will include capital expenditure in the range of EUR400 million-EUR500 million, dividends (in line with the group's stated policy of 2x-3x coverage), and a working capital outflow. Mondi has about EUR190 million of debt maturities due in 2013 relating to a number of credit lines, which we believe will be successfully refinanced.
Mondi's bank facilities contain financial maintenance covenants, including a ratio of net debt to EBITDA of no more than 3.5x. We believe that Mondi will be able to maintain significant covenant headroom over the near to medium term.
The stable outlook reflects our view that Mondi will be able to sustain credit metrics commensurate with our current rating, despite weakening operating conditions in Mondi's main markets.
Rating upside appears remote over the next 18 months, as Mondi's credit metrics have weakened following the debt funded acquisition of Nordenia.
Rating downside, albeit remote as long as the company follows its stated financial policy, would likely arise through a significant deterioration in the paper markets or further material debt-funded acquisitions.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Research Update: South Africa FC Long-Term Rating Lowered To 'BBB'; LC Ratings Lowered To 'A-/A-2'; Outlook Remains Negative, Oct. 12, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key Credit Factors: Methodology And Assumptions On Risks In The Packaging Industry, Dec. 4, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008