Nordic Credit Rating said today that it had affirmed its 'BBB' long-term issuer rating on Swedish forestry cooperative Södra Skogsägarna ekonomisk förening (Södra). The outlook is stable. The 'N-1+' short-term issuer rating and 'BBB' senior unsecured issue ratings were also affirmed.
Rating rationale
The long-term rating reflects Södra's strong balance sheet, low financial leverage, and healthy cash flows. The rating also reflects the company's healthy 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 currently 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 is under investigation by European authorities over the pricing of market pulp. Like its industry peers, the company is subject to recurring media scrutiny due to concerns about unsustainable harvesting.
To reflect Södra's strong projected credit metrics, we have adjusted our assessment of financial ratios upward by two notches. Over an economic cycle we expect the metrics to weaken due to the volatility of market prices, while the company's financial policy allows for higher leverage. We have reflected this by lowering our assessment of risk appetite, leaving our overall financial risk assessment unchanged.
Stable outlook
The stable outlook reflects our expectations that Södra's profitability and financial profile will remain strong and cash flows healthy. We expect prices for market pulp and sawn wood products to decrease in 2022 but remain at high levels, following exceptionally strong markets in 2021. In our view, Södra's balance sheet is sufficiently strong to withstand weaker market conditions than at present. The outlook also reflects our expectations that the investigation into market pulp prices will have no or limited repercussions. We could raise the rating to reflect a long-term improvement in financial risk profile, together with a commitment to a reduced risk appetite, improved operational efficiency as a result of better process economics, or 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, unexpected long-term mill outages that impact costs and volumes, or regulatory changes that have a negative effect on the business risk profile, or substantial fines that weaken credit metrics.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB | BBB |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N-1+ | N-1+ |
| Senior unsecured issue rating: | BBB | BBB |
Contacts:
Marcus Gustavsson, analyst, +46700442775, marcus.gustavsson@nordiccreditrating.com
Gustav Nilsson, analyst, +46735 42 04 46, gustav.nilsson@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 18 Feb. 2022, NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022 and NCR's Rating Principles published on 16 Sep. 2019. For the full regulatory disclaimer please see the rating report.