Johannesburg, 20 March 2019 — Global Credit Ratings has upgraded the national scale issuer ratings assigned to Sappi Southern Africa Limited to AA-(ZA) and A1+(ZA) in the long and short term respectively; with a Stable outlook.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Sappi Southern Africa Limited (“SSA”) based on the following key criteria:
The upgrade is premised on a robust earnings profile, which is expected to be sustained in the medium-term. This is underpinned by continued investment in higher-yielding, growth products, proven robustness of the vertically integrated business model and the rand hedge derived from its largely exported product range. Further comfort is derived from certain structural factors, including efficiencies derived from group procurement policies, sales to Sappi Limited (“Sappi”) entities, import parity on domestic sales contracts, and cash flows locked in through long-term Sappi contracts with customers. Investment in dissolving wood pulp, in particular, is expected to see SSA’s margins continue to outperform other Sappi regions in the medium term, supporting a strong free cash flow baseline over the rating horizon.
Downside risks may arise from (inter alia) unforeseen demand-side shocks due to weaker than anticipated global economic growth or rapid product substitution, unplanned plant disruptions, adverse global trade policy developments, pressure on pricing, and sustained variable cost inflation (partly driven by adverse currency movements). GCR has noted initiatives taken to ensure the sustainability of its forestry resources, including relationships with surrounding communities. That said, uncertainty in respect of outstanding land claims and domestic land policies presents unquantifiable longer-term risks.
Sappi has entered a new expansionary capex cycle, through which SSA is investing extensively in additional capacity, plant efficiency enhancement, as well as reducing energy costs and its fossil fuel footprint. Accordingly, SSA reported capital commitments of R5.7bn at FY18, which management intends to fund mainly from internally generated cash flows.
SSA continues to present low gearing, robust debt service and ample headroom on existing covenants, with net debt: EBITDA to be managed within Sappi’s 2.0x comfort level. Credit risk metrics remain moderately conservative and within range for the ratings when adjusted for capital and operating lease commitments. GCR notes previously substantial balances transferred out of SSA to reduce group debt, support capex and for the Sappi dividend (managed at a self-imposed threshold of 3.0x cover). According to management, internal structures ensure that SSA prioritises its internal debt service/repayment and capex requirements before upstreaming funds to Sappi.
While R1bn in committed facilities does not fully cover FY20 debt maturities, GCR has considered support already secured for a R1.5bn seven-year loan, liquidity derived from the sale of receivables (with rigorous working capital management expected to mitigate liquidity risk), and well-entrenched banking relationships that have seen SSA secure bridging and other additional facilities when required. SSA’s unrestricted cash balances were also considered, albeit these are likely to be largely utilised/run down during FY19.
Looking ahead, upward rating action would be considered upon the successful execution and bedding down of ongoing capex, supporting strong medium-term free cash flows and conservative gearing. Conversely, cash flow pressures arising from, inter alia; poor project delivery or plant performance challenges would have a negative rating effect, as would excessive dividend payments amidst the current capex cycle. Sustained exogenous pressures and regulatory risks that curtail supply and demand dynamics, margins and free cash flows would also be negatively viewed.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2015)||Last rating (May 2018)|
|Long term: A(ZA); Short term: A1(ZA)||Long term: A+(ZA); Short term: A1+(ZA)|
|Outlook: Stable||Outlook: Positive|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Eyal Shevel|
|Deputy Sector Head: Corporate Ratings||Sector Head: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Sappi Southern Africa Limited issuer rating reports, 2015-18
RATING LIMITATIONS AND DISCLAIMERS
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|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Hedge||A form of insurance against financial loss or other adverse circumstances.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long-Term Rating||A long-term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short-term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Upstream||A term referring to the exploration and extraction of a commodity, in contrast with the downstream manufacturing and processing.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms, please click here
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Sappi Southern Africa Limited participated in the rating process via face-to-face management meetings, teleconferences as well as written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Sappi Southern Africa Limited.
The information received from Sappi Southern Africa Limited and other reliable third parties to accord the credit ratings included:
- audited financial results for Sappi Limited for 2018, and five years comparative financial statements;
- audited financial results for Sappi Southern Africa Limited for 2018, and five years comparative financial statements;
- Sappi Limited results for the three months ended December 2018
- details of funding facilities; and
- financial projections for Sappi Southern Africa Limited to 2023.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR upgrades Sappi Southern Africa Limited’s rating to AA-(ZA); Outlook Stable.