Mondi Group Upgraded To #BBB+# On Strengthening Credit Outlook Stable

Stocks and Financial Services Press Releases Thursday April 12, 2018 18:24
LONDON--12 Apr--S&P Global Ratings

LONDON (S&P Global Ratings) April 12, 2018--S&P Global Ratings said today that it raised its long-term issuer credit rating on U.K. and South Africa-listed paper and packaging producer Mondi Group to 'BBB+' from 'BBB'. The outlook is stable. We also raised the issue ratings on the outstanding senior unsecured debt issued by Mondi Finance PLC to 'BBB+' from 'BBB'.

The upgrade reflects the recently announced dividends (ordinary and special) and the Powerflute acquisition, as well as our view that Mondi's financial policy will remain conservative.

The stable outlook takes into account our view that Mondi's credit metrics will remain strong and still allow for acquisitions or shareholder returns. We believe that the group will continue to exercise a disciplined acquisition strategy. Together with strong cash flow generation, we believe that Mondi would rapidly reduce debt (following any such acquisition or shareholder payment) such that the S&P Global Ratings-adjusted ratio of debt to EBITDA is unlikely to remain above 2.0x for a sustained period.

As a result, we believe that Mondi could maintain credit metrics at the current level, with adjusted debt to EBITDA likely to remain below 2x, and funds from operations (FFO) to debt to remain at 45%-60%.

We continue to consider Mondi's business risk profile as satisfactory, underpinned by the group's well-invested asset base, which results in excellent profitability compared with the broader forest and paper products sector. In recent years, Mondi has expanded its downstream consumer packaging business, which we think mitigates volatility and cyclicality stemming from its more commodity-like paper products segments. We also consider Mondi's strong market positions, its wide product and geographical diversity, and its strong cost position as positive for the rating. These strengths are somewhat mitigated by its exposure to the structurally declining uncoated wood-free paper sector (although its operations are currently highly profitable), and higher-than-average country risk due to a portion of revenues coming from South Africa and Russia.

In our base case, we assume:
  • Organic revenue growth of about 2%-3% for the next two years, supported by recent kraftliner paper price increases and ongoing capital investments, further boosted by acquisitions completed in 2016. These are partly offset by the continued structural industrial decline in uncoated fine paper volumes and competitive pricing pressures in the consumer packaging division.
  • Adjusted EBITDA margins of around 20.5%, supported by recent price increases, cost-saving initiatives, but counterbalanced by high emerging market inflation, currency movements, and increases in wood and energy prices.
  • Capital expenditure (capex) that Mondi has guided as being EUR700 million-EUR800 million in 2018 and 2019. Capex might decrease slightly from 2020.
  • Although it is still subject to regulatory approvals, we assume that the Powerflute acquisition (at a cost of EUR365 million) will close in 2018. We do not assume any further acquisitions for 2018 or thereafter.
  • Dividend payments of about EUR785 million in 2018. We do not assume any special dividends after 2018 and expect ordinary dividends to remain in line with their historical trend and the group's stated dividend policy of 2x-3x coverage.
Based on these assumptions, we arrive at the following credit measures:
  • Robust free operating cash flow generation (cash flow after capex) of around EUR400 million-EUR450 million in 2018 and 2019, depending on the size of the company's growth capex.
  • Adjusted debt to EBITDA of 1.7x-1.6x in 2018-2019; and
  • Adjusted FFO to debt of close to 50% over the same period.

The recent acquisition of Powerflute and the announced special dividend payment are in line with our expectations and Mondi's financial policy. Despite these, Mondi's forecast credit metrics remain in line with a modest financial risk profile. We now believe that the company has sufficient headroom under its current credit metrics to make further acquisitions or shareholder returns and still maintain the current rating level. We thereby no longer apply a one-notch negative financial policy modifier.

The stable outlook reflects our view that Mondi will continue to generate strong cash flows over the next two years, with credit metrics providing headroom for the company to make potentially material acquisitions as well as return cash to shareholders. We anticipate that the group should be able to maintain a modest financial risk profile, even if it made relatively sizable investments, or market conditions were to deteriorate.

We anticipate that sizable investments could result in temporarily elevated leverage, but that Mondi's strong cash flow and prudent financial policy would result in a rapid rebound in credit metrics. We could, however, lower the rating if Mondi's operating performance were to fall significantly short of expectations, in combination with a more aggressive financial policy and higher shareholder returns, such that FFO to debt dropped to below 45% and debt to EBITDA rose above 2.0x for a sustained period.

We could raise the rating if we saw evidence of Mondi's willingness to maintain improved credit metrics, such as FFO to debt sustainably above 60%. At this stage, however, we anticipate that the group's long-term financial policy and strategy is consistent with a modest financial risk profile, and that the current headroom in credit metrics would likely to be used for acquisitions or shareholder returns.


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