Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB' long-term issuer rating on Sweden-based Södra Skogsägarna ekonomisk förening. The outlook is stable. At the same time NCR affirmed the 'N3' short-term rating. At the same time NCR affirmed the 'BBB' senior unsecured issue rating.
Rating rationale
The long-term rating reflects Södra's strong balance sheet, low financial leverage, and healthy cash flows. It also reflects the company's robust long-term profitability, cost-efficient operations, and extensive geographic reach. We assess the company's liquidity as strong and believe that the current business model and ownership structure help to moderate risk.
The rating is constrained by the forestry sector's historical earnings volatility, which is mainly due to the cyclical markets for market pulp and sawn wood products. Although Södra's credit metrics are strong, its financial policy allows for higher leverage, which we reflect in our financial risk assessment. The rating is also constrained by Södra's exposure to homogenous end-products along with the large size of its customers, which effectively reduces the company's bargaining power. We view the company's relatively high customer concentrations, especially in its pulp sales, and its unhedged currency exposures as negative rating factors. Environmental, social and governance factors are assessed as neutral even though Södra, like its industry peers, is subject to recurring media scrutiny due to concerns about unsustainable harvesting and possible changes in EU regulations. The company is also under investigation by the EU over the pricing of market pulp.
Stable outlook
The stable outlook reflects our expectations that Södra's financial profile will remain strong despite an anticipated economic slowdown. In our view, the company's balance sheet has sufficient strength to withstand weaker market conditions. We expect prices for market pulp and sawn wood products to decrease in 2023 but remain at high levels by historical standards, following exceptionally strong markets in recent years. The outlook further reflects our expectations that the investigation into market pulp prices will have no or limited repercussions.
We could raise the rating to reflect long-term improvement in operating conditions and stable, high margins. We could also raise the rating to reflect increased diversity through investments in new value-added products.
We could lower the rating to reflect deteriorating market fundamentals resulting in a long-term net debt/EBITDA ratio above 2x. We could also lower the rating to reflect regulatory changes or substantial fines that have a negative effect on the company's business risk profile or weaken its credit metrics. Other negative rating factors include unexpected long-term mill outages that negatively impact costs and volumes.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB | BBB |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB | BBB |
Contacts:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 18 Feb. 2022, NCR's Rating Principles published on 24 May 2022 and NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022. For the full regulatory disclaimer please see the rating report.