2007 Annual Report - Sappi

In 2006, both Standard & Poor’s (S&P) and Moody’s revised their
ratings by downgrading the group ratings to sub-investment
grade. The main stated reason for this change was the protracted
recovery in key rating metrics as required for a BBB-/Baa3 rating.
In October 2007 S&P further revised their rating for the group from
BB+ to BB, while moving the outlook from negative to stable. This
change was mainly as a result of an industry-wide re-rating of the
European Forest Products sector, sustained cost inflation, and an
uncertain outlook for paper pricing and demand in the light of an
expected softening in economic growth.
S&P commented on the downgrade by highlighting the group’s
financial underperformance in recent years and, in its view,
the limited prospects of a recovery to the level required for a
BB+ rating in the near future.
Fitch confirmed the Sappi Manufacturing rating in September
2007, commenting on the strong contribution by Saiccor and
the sound debt position.
Moody’s differentiates between the guaranteed and nonguaranteed
debt of Sappi Papier Holding (our main non-South
African borrowing entity). However, Moody’s places a value on
the Sappi Limited guarantee to the extent that it is supported
by Sappi Manufacturing’s operating performance, the only source
of potential income for Sappi Limited to meet payments under
the guarantee. For this reason Moody’s expects the Sappi
Manufacturing proportion of group debt to be at 20% or below
over time.
Gearing
Net debt to capitalisation using the method of calculation
explained for each of the past three years is set out below:
US$ million 2007 2006 2005
Net debt 2,257 2,113 2,008
Debt & equity 5,221 4,554 4,911
Net debt to
capitalisation ratio 43% 46% 41%
Management monitors the group’s gearing in the context of the
complex trade-offs associated with determining an appropriate
level of debt finance, viz – financial risk, credit rating, the cost
of debt and the expected return that can be earned on that
debt. In regard to our debt level, we also monitor cash flow to
net interest cover. We recognise that we operate in an industry
that normally generates substantial and reasonably reliable cash
flows and that management has significant flexibility to delay or
minimise capital expenditure (which is a major absorber of cash)
in difficult times in order to reduce financial risk.
Significant accounting policies and judgments
The group has defined accounting policies as significant if
they have the potential to materially affect the groups’ financial
performance, position or cash flows or involve significant
judgement or estimation by management.
The group’s significant accounting policies are those that
relate to:
• Plantations
• Taxation
• Property, plant and equipment
• Hedge accounting
• Post employment benefit funds
• Provisions
The effect of these accounting policies and judgments is
included on page 86 of the financial statements.
Effect of the adoption of new standards
There has been no material effect on the group’s reported
results for new accounting standards which the group has
adopted in the current year.
Impact of accounting standards not yet adopted
The accounting policies in the forward statements set out certain
accounting standards which the group has not yet adopted.
The group has done a preliminary evaluation of the potential
effect of these standards and has determined that they will not
have a material impact on the group’s reported results, although
there will be more disclosure that is required by the group.
Shareholding and equity
Shareholding
The group’s primary listing is on the JSE Limited, the main stock
exchange in South Africa, and maintains secondary listings on the
New York and London Stock Exchanges. Information regarding
shares, share price, the value of shares traded, main shareholders
and other related information is contained on pages 50 and 51 of
the Annual Report.
sappi limited | 07 | annual report 45