Standard & Poors Ratings Direct (12 April 2011 - Stora Enso

Stora Enso Oyj
Primary Credit Analyst:
Jacob Zachrison, Stockholm (46) 8-440-5920; jacob_zachrison@standardandpoors.com
Secondary Contact:
Peter Kernan, London (44) 20-7176-3618; peter_kernan@standardandpoors.com
Table Of Contents
Major Rating Factors
Rationale
Outlook
Business Description
Business Risk Profile: Exposed To Highly Cyclical Forest Product Industry
Financial Risk Profile: Relatively Weak Operating Cash Flow Generation
Financial Statistics/Adjustments
April 12, 2011
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Stora Enso Oyj
Major Rating Factors
Strengths:
• One of the world's largest forest products companies, with a diverse
earnings base.
• Competitive cost position.
• Moderate debt leverage.
Weaknesses:
• Presence in cyclical and currently oversupplied paper markets.
Corporate Credit Rating
BB/Positive/B
Nordic National Scale Rating
--/--/K-4
• Exposure to the graphic paper segments, where demand is hampered by structural challenges.
• Weak profitability and cash generation, albeit currently improving.
Rationale
The ratings on Finland-based forest products group Stora Enso Oyj reflect its fair business risk and significant
financial risk profiles.
The fair business risk profile is based on the group's exposure to the highly competitive, commoditized, and cyclical
forest product industry (especially graphic paper), and its relatively weak, albeit improving, profitability. These
negative factors are balanced by strong positions in the relatively stable and less export-dependent packaging
segments, significant pulp and energy integration including low-cost South American assets, and broad product and
geographic diversification.
The group's significant financial risk profile is based on its cyclical and generally weak operating cash flow
generation (albeit currently improving), which is offset by a balanced capital structure with modest debt leverage,
and strong liquidity.
Key business and profitability developments
Following a severe drop in demand for European forest products in 2009 and materially lower prices, including
price decreases in newsprint and magazine paper at the beginning of 2010, market conditions in the industry
gradually improved during 2010. A recovery in demand and increased pulp prices supported a gradual recovery in
paper and board prices. As a result of improved market conditions and internal cost savings mitigating cost
inflation, Stora Enso's operating performance improved materially in 2010. Sales increased by about 15% compared
with 2009, and the adjusted EBITDA margin increased to 11.9% from 8.6% in 2009.
Although we believe that the industry will remain cyclical, the near-term industry outlook is generally favorable,
with average prices in many segments likely to be higher in 2011 than in 2010. This is especially valid for newsprint
(accounting for about 12% of external group sales), where we understand that price increases in Europe of
15%-20% were agreed at the beginning of the year. In our opinion, there are good prospects that Stora Enso will be
able to maintain its current operating performance over the near term.
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Key cash flow and capital-structure developments
During 2008 and 2009 Stora Enso's cash flow debt-protection measures were below levels that we consider
consistent with the ratings, as a result of weak market conditions and operating performance. Improved market
conditions in 2010, translated, however, into significantly increased operating cash flows, with adjusted funds from
operations increasing to €1.1 billion from €0.7 billion in 2009. Combined with low investment levels, with capital
expenditures at €0.4 billion, credit measures improved significantly. Adjusted funds from operations to debt and
adjusted debt to EBITDA were about 31% and 3.0x in 2010, compared with 18.5% and 4.9x respectively for
full-year 2009.
Current credit measures are strong in relation to our expectations for the ratings, i.e. adjusted funds from operations
to debt of above 20% and adjusted debt to EBITDA of about 3.5x. In our opinion, there are good prospects that
Stora Enso will maintain its current credit measures over the near term, reflecting the favorable near-term industry
outlook. The group's financial position could, however, weaken if the group were significantly to increase spending
levels, although our base case assumes modestly increased capital expenditure levels compared with 2010. For
example, in January 2011, the group announced that it would build a new pulp mill in Uruguay through a joint
venture company Montes del Plata (in which Stora Enso has a 50% share), and also that the group would build a
new containerboard mill in Poland. Stora Enso's acquisition activity was low in 2010, and we expect continued low
acquisition spending in the near term.
Liquidity
The short term rating is 'B'. In our view Stora Enso's overall liquidity is strong, as liquidity resources substantially
exceed short-term cash uses, loan documentation is free from restrictive financial covenants, and the group has a
solid relationship with its banks. This was evidenced in December 2010, when the group signed a new three-year
committed credit facility of €700 million, with no financial covenants.
The group's primary liquidity sources consist of:
• Cash and liquid assets of €1.1 billion at year-end 2010 (of which we consider about €0.9 billion to be excess
cash);
• An undrawn committed revolving credit facility of €0.7 billion maturing in January 2014 (free of financial
covenants that would restrict Stora Enso from drawing on the facility); and
• About €700 million (on Dec. 31, 2010) from various long-term sources, including Finnish pension fund loans.
• Funds from operations, which were €1.1 billion in 2010.
These sources should be well in excess of the following near term outflows:
• Debt-maturities of about €0.7 billion in 2011, and about €0.3 billion in 2012.
• Working capital increases (which were about €0.3 billion in 2010) and capital expenditures (about €0.4 billion in
2010, but expected to be higher in 2011); and
• Dividend payments (€158 million paid in 2010, proposed to be about €197 million in 2011).
Recovery analysis
The various unsecured debt issued by Stora Enso is rated 'BB', the same level as the corporate credit rating. The
recovery rating is '3', indicating our expectation of meaningful (50%-70%) recovery in an event of payment default.
Cover is at the low end of the range.
Stora Enso Oyj
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For the purpose of our analysis, we simulate a hypothetical payment default. In our hypothetical scenario, we
believe that the group would face pressure on profitability resulting from over-supply, pressure on prices, and input
cost volatility. The group's EBITDA margin at the simulated point of default is below 6%. Accordingly, we have
extended the default year from 2013 to 2014 in line with the maturity of the new revolving credit facility.
In our hypothetical scenario, we have valued the business using a going-concern approach supported by Stora Enso's
leading market positions, modern and efficient asset base, broad product and geographic diversity, and significant
vertical integration. The valuation at the point of hypothetical default results from a combination of discounted cash
flow and market multiple approaches, taking into account historical valuations in the paper sector, and is based on
stressed EBITDA of €515 million and a blended multiple of 6.2x EBITDA.
At the hypothetical point of default, the stressed enterprise value amounts to about €3.2 billion and is reduced by
priority obligations estimated at about €1.27 billion. These would comprise the enforcement costs as well as finance
leases, mortgage loans, and structurally senior bank debt of subsidiaries. This would result in a residual enterprise
value of about €1.9 billion for the holders of the €3.6 billion unsecured debt. The waterfall of payments would lead
to recovery prospects for the unsecured debt in the 50%-70% range.
We have assumed that the new €700 million revolving facility due 2014 would be fully drawn at default and would
rank pari passu with existing unsecured debt. We have assumed that drawings under the pension loan at the time of
default would be about €235 million, and that the loan would also rank pari passu with the rated notes due to its
unsecured nature.
In our view, if the pension loan drawings were to increase to the €800 million limit currently available, this would
not materially impact the recovery ratings. However, in the event that such borrowings were secured by any of Stora
Enso's assets, unsecured debt recoveries might be significantly lower.
Outlook
The positive outlook reflects Stora Enso's improved operating performance, cash flows, and credit measures, which
if sustained could lead to a higher rating within the next year. This would be exemplified by a maintained adjusted
EBITDA margin of at least 12%, adjusted funds from operations of 25%-30%, and adjusted debt to EBITDA of
about 3x.
The outlook could be revised to stable if operating performance and credit measures were to weaken from their
current levels, with, for example, adjusted funds from operations to debt falling below 25%, and adjusted debt to
EBITDA increasing to about 3.5x. This could be a result of a decline in industry conditions and price levels. It could
also result from materially higher debt levels due to expansionary investments, although our base case assumes a
modest increase in investment levels in 2011.
Business Description
With sales of €10.3 billion in 2010, Stora Enso is among the largest diversified forest product companies globally,
with 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.
Stora Enso Oyj
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Table 1
Stora Enso Oyj Operating Statistics, Continuing Operations*
(Mil. € ) Sales Operating margin (%)
2010 2009 2008 2010 2009 2008
Newsprint & bookpaper 1261.6 1325.8 1,594.7 (0.9) 9.7 8.8
Magazine paper 2054.2 1676 2,177.0 4.4 2.4 4.1
Fine paper 2125.7 1823.9 2,111.7 12.2 1.8 3.8
Consumer board 2314.7 1895.9 2,231.9 12.0 8.7 4.8
Industrial packaging 949.5 815.5 1,076.5 6.9 2.2 6.9
Wood products 1588.7 1239.6 1,503.3 4.5 (0.7) (4.5)
*Excluding non-recurring items and fair valuations
The group has production facilities in several countries, including Finland, Sweden, Germany, Belgium, Brazil,
Russia, and China. Production and sales are focused on Europe, but North America and Asia are also important
markets (see table 2).
Table 2
Stora Enso Oyj Geographical Sales Breakdown - Continuing Operations
(Mil. €) 2010 2009 2008
Europe 7,942.5 7,180.0 8,848.1
US 153.0 123.7 106.2
Latin America 381.7 262.3 360.2
Asia 1054.9 779.5 901.6
Africa 252.8 237.1 246.9
Other 512 362.5 565.8
Total 10,296.9 8,945.1 11,028.8
Stora Enso's strategy includes the following key points:
• New growth markets in emerging countries;
• Maintaining and developing its global leadership position in fiber-based packaging;
• Increased integration with plantation-based pulp; and
• Presence in selected paper grades.
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 no state support is factored into the ratings.
Business Risk Profile: Exposed To Highly Cyclical Forest Product Industry
The main weaknesses of the group's "fair" business risk profile, according to our classifications, are:
• Exposure to the highly cyclical forest product industry, characterized by demand fluctuations resulting from
economic activity, recurring periods of over-capacity, and pricing pressure.
• A history of intense competition within the industry. Here the focus has been on market share and capacity
utilization (due to high fixed costs), as well as market fragmentation.
Stora Enso Oyj
• High sensitivity to the cost of raw materials, and limited pass-through of costs because of poor pricing power.
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• Export dependence in many segments and exposure to foreign exchange rate developments. A strengthening of
the euro against the U.S. dollar makes Stora Enso and other European producers less cost competitive than their
U.S.-based competitors; in addition, such a strengthening could lower European paper prices.
• Moderate barriers to entry, especially in many growth markets. This reflects a high degree of product
commoditization, moderate production difficulties, and considerable cost advantages for producers with new
equipment. These factors are balanced by a limited degree of product differentiation and benefits of scale.
• A still significant exposure to graphic paper (with newsprint, magazine, and fine paper representing almost 50%
of sales in 2010). These are generally more cyclical than packaging or hygiene grades, and are challenged with
structurally declining demand.
• Limited wood supply integration, with less than 10% of sourcing from own forestland (in Brazil, China and
Uruguay). This is partly balanced by long-term supply agreements.
These negative factors are partly offset by:
• Stora Enso's somewhat better-than-industry-average cost position. This reflects the large size and efficiency of its
paper machines, major restructuring and cost savings initiatives over the past few years, fairly high energy
integration, and high levels of pulp integration.
• Strong presence in the consumer and industrial packaging segments (about 30% of sales in 2010), which tend to
show more resilience to cyclical downturns.
• Self-sufficiency in terms of pulp needs. This is mainly a result of low-cost plantation-based pulp in Latin America,
which will grow further in next few years following the decision to build a new pulp mill in Uruguay. In addition,
the group currently benefits from being a net seller of pulp as pulp prices increased significantly in 2010.
• Self-sufficiency in electricity and energy is high, in our view, at about 60% at a group level. The group owns a
large amount of low-cost energy generation facilities (hydro, nuclear, and coal).
• A well-diversified asset and product portfolio. Although the main paper grades partly overlap, packaging and
wood products partly follow a different demand pattern, which helps reduce earnings cyclicality, in our view.
• Strong and growing presence in emerging markets. This includes magazine and fine paper production in China, as
well as pulp and magazine capacity in Latin America (supported by own forestland assets).
Financial Risk Profile: Relatively Weak Operating Cash Flow Generation
The main weaknesses of the group's "significant" financial risk profile, according to our classifications, are:
• Relatively weak operating cash flow generation over the past few years, reflecting weak market conditions. This
put pressure on coverage ratios, although a recovery was seen in 2010.
• Significant volatility in free operating cash flow, reflecting working capital use and differences in capital
expenditure levels. Capital expenditures are likely to increase in the next few years, reflecting growth investments
in, for example, Latin America.
This is balanced by the following supportive factors:
• Moderate debt leverage. Stora Enso's adjusted debt-to-capital ratio was 37% as of Dec. 31, 2010, and has been
between 37% and 44% over the past five years.
Stora Enso Oyj
• Ability and willingness to temporarily reduce capital expenditures and dividends to preserve cash. This was
evidenced in 2009, when market conditions remained weak, and the company reduced capital expenditures to
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about €0.4 billion from €0.7 billion in 2008, and cut dividends by 55%.
• A strong liquidity position, in our view, with liquidity resources well in excess of the next two years' debt
maturities.
Financial Statistics/Adjustments
In accordance with our criteria, we make several adjustments to Stora Enso's financial position (see table 3).
Stora Enso has material interests in certain companies that are reported as associated companies and recorded under
the equity method. These companies are primarily Bergvik Skog AB (not rated; 43% equity stake), Veracel Celulose
S.A. (not rated; 50%), and Tornator Oy (not rated; 41%). The debts in Bergvik and Tornator are non-recourse to
Stora Enso, and we make no debt adjustment. Stora Enso is exposed to Bergvik and Tornator through its ownership
stakes and long-term supply contracts. The exposure to Bergvik and Tornator is mitigated by the favorable
characteristics of the companies' asset bases; namely, forestland, which normally does not decrease in value over
time. Stora Enso guarantees its share of Veracel's debt, and we include this liability in our analysis.
Included in available-for-sale investments, Stora Enso reports its 14.8% stake in Finnish power generation company
Pohjalan Voima Oy (PVO; not rated), which, in turn, indirectly owns 57% of a Finnish nuclear operator,
Teollisuuden Voima Oy (TVO; not rated). Although this is a strategic asset for the group, we believe that the value
of the PVO holding, given the current high energy price environment, more than balances Stora Enso's
proportionate share in the liabilities of PVO. Our view could change, however, should energy prices fall significantly
below the procurement costs for the PVO supplies.
In the surplus cash adjustment to debt, we have excluded €250 million from the reported cash balances, reflecting
our view of what we consider as cash tied up in the group's operations.
Table 3
Reconciliation Of Stora Enso Oyj Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. €)*
Stora Enso Oyj reported amounts
--Fiscal year ended Dec. 31, 2010--
Operating Operating Operating
Cash flow
Shareholders' income income income (after Interest
from
Debt
equity (before D&A) (before D&A) D&A) expense operations
Reported 4,011.2 6,202.9 1,309.5 1,309.5 1,026.8 108.0 811.9
Standard & Poor's adjustments
Operating leases (Note 31
Commitments and
Contingencies p. 117, 5%
discount rate applied)
Postretirement benefit
obligations (Note 22
Post-Employment Benefits p.
89)
Guarantee to Veracel (Note 31,
p. 117)
Surplus cash and near cash
investments (Note 24 Other
Provisions - minimum cash
requirements)
Stora Enso Oyj
109.0 -- 29.8 5.1 5.1 5.1 24.7
246.2 (0.8) 12.8 12.8 12.8 12.7 15.0
123.5 -- -- -- -- -- --
(860.9) -- -- -- -- -- --
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Table 3
Reconciliation Of Stora Enso Oyj Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. €)* (cont.)
Capitalized interest (Note 9, p.
67)
Share-based compensation
expense (Note 7, p. 62)
Reclassification of
nonoperating income
(expenses) (Note 9, p. 64)
Reclassification of
working-capital cash flow
changes
-- -- -- -- -- 11.5 (11.5)
-- -- -- 28.0 -- -- --
-- -- -- -- 23.7 -- --
-- -- -- -- -- -- --
Minority interests -- 51.8 -- -- -- -- --
Fair valuations, and other (Note
3, p. 51)
Equity accounted investments
result (Note 5, . 58)
Change in value of biological
assets (Note 5, p. 58)
Restructuring costs excluding
fixed asset impairment (Note 3,
p. 51)
Fixed assets and impairment
charges (Note 12 p. 70)
-- -- (59.2) (59.2) (59.2) -- --
-- -- (112.5) (112.5) -- --
-- -- 4.0 4.0 4.0 -- --
-- -- 39.7 39.7 39.7 -- --
-- -- -- -- (246.2) -- --
Total adjustments (382.2) 51.0 (85.5) (82.1) (220.1) 29.3 28.2
Standard & Poor's adjusted amounts
Operating
Cash flow
income
Interest
from
Debt Equity (before D&A) EBITDA EBIT expense operations
Adjusted 3,629.0 6,253.9 1,224.1 1,227.4 806.7 137.3 840.1
*Please note that two reported amounts (operating income before D&A and cash flow from operations) are used to derive more than one Standard & Poor's-adjusted
amount (operating income before D&A and EBITDA, and cash flow from operations and funds from operations, respectively). Consequently, the first section in some tables
may feature duplicate descriptions and amounts.
Table 4
Stora Enso Oyj -- Peer Comparison*
Stora Enso Oyj UPM-Kymmene Corp. Mondi Group
Rating as of April 12, 2011 BB/Positive/B BB/Stable/B BB+/Positive/--
--Average of past three fiscal years--
(Mil. €)
Revenues 10,090.3 8,770.0 5,943.3
EBITDA 981.2 1,253.6 795.5
Funds from operations (FFO) 794.1 959.4 616.5
Capital expenditures 521.1 362.6 617.8
Debt 3,966.5 4,634.7 2,039.5
Equity 5,695.6 6,453.2 2,932.1
Adjusted ratios
EBITDA/revenues (%) 9.7 14.3 13.4
Oper. income (bef. D&A)/revenues (%) 9.8 14.4 13.9
EBITDA interest coverage (x) 5.8 5.5 4.5
Stora Enso Oyj
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Table 4
Stora Enso Oyj -- Peer Comparison* (cont.)
Return on capital (%) 4.8 3.7 8.3
FFO/debt (%) 20.0 20.7 30.2
Free operating cash flow/debt (%) 10.6 14.8 2.5
Debt/EBITDA (x) 4.0 3.7 2.6
Total debt/debt plus equity (%) 41.1 41.8 41.0
*Fully adjusted (including postretirement obligations). Excess cash and investments netted against debt.
Table 5
Stora Enso Oyj -- Financial Summary*
Rating history
--Fiscal year ended Dec. 31--
2010 2009 2008 2007 2006
BB/Positive/B BB/Negative/B BB+/Stable/B BBB-/Negative/A-3 BBB/Stable/A-2
(Mil. €)
Revenues 10,296.9 8,945.1 11,028.8 11,848.0 11,460.0
EBITDA 1,227.4 768.9 947.3 1,450.1 1,702.4
Net income from continuing operations 766.0 (879.7) (677.7) 10.5 683.1
Funds from operations (FFO) 1,111.8 702.4 568.0 1,281.8 1,239.0
Capital expenditures 428.6 427.8 706.9 826.5 609.7
Debt 3,629.0 3,801.1 4,469.5 4,441.7 5,965.3
Equity 6,253.9 5,182.5 5,650.5 7,548.0 7,919.4
Debt and equity 9,882.9 8,983.6 10,120.0 11,989.7 13,884.7
Adjusted ratios
EBITDA/revenues (%) 11.9 8.6 8.6 12.2 14.9
Oper. income (bef. D&A)/revenues (%) 11.9 8.8 8.7 12.5 14.9
EBIT interest coverage (x) 5.9 2.5 1.4 4.5 4.2
EBITDA interest coverage (x) 8.9 5.2 4.3 6.1 7.3
Return on capital (%) 8.2 3.8 2.7 7.9 6.5
FFO/debt (%) 30.6 18.5 12.7 28.9 20.8
Free operating cash flow/debt (%) 11.3 24.0 (1.3) 2.8 15.4
Discretionary cash flow/debt (%) 7.0 19.9 (9.2) (5.2) 9.4
Debt/EBITDA (x) 3.0 4.9 4.7 3.1 3.5
Debt/debt and equity (%) 36.7 42.3 44.2 37.0 43.0
*Fully adjusted (including postretirement obligations). Excess cash and investments netted against debt.
Ratings Detail (As Of April 12, 2011)*
Stora Enso Oyj
Corporate Credit Rating BB/Positive/B
Nordic National Scale Rating --/--/K-4
Commercial Paper
Foreign Currency B
Nordic National Scale Rating K-4
Senior Unsecured (10 Issues) BB
Stora Enso Oyj
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Ratings Detail (As Of April 12, 2011)*(cont.)
Corporate Credit Ratings History
15-Dec-2010 BB/Positive/B
14-May-2009 BB/Negative/B
24-Apr-2009 BB+/Watch Neg/B
24-Feb-2009 BB+/Negative/B
11-Nov-2008 BB+/Stable/B
22-Oct-2007 BBB-/Negative/A-3
05-Jun-2007 BBB/Negative/A-3
11-Nov-2008 Nordic National Scale Rating --/--/K-4
11-Nov-2008 --/--/K-3
Business Risk Profile Fair
Financial Risk Profile Significant
Debt Maturities
(As of Dec. 31, 2010)
2011: €752 mil.
2012: €257 mil.
2013: €100 mil.
2014: €772 mil.
2015: €560 mil.
Thereafter: €1,570 mil.
Related Entities
Stora Kopparbergs Bergslags AB
Issuer Credit Rating BB/Positive/B
*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.
Additional Contact:
Industrial Ratings Europe; CorporateFinanceEurope@standardandpoors.com
Additional Contact:
Industrial Ratings Europe; CorporateFinanceEurope@standardandpoors.com
Stora Enso Oyj
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