Sweden-Based SCA#s Announced Spin-Off SCA Hygiene Assigned #A-/A-2# Preliminary Outlook Stable

Stocks and Financial Services Press Releases Thursday October 27, 2016 16:44
MILAN--27 Oct--S&P Global Ratings

MILAN (S&P Global Ratings) Oct. 27, 2016--S&P Global Ratings today assigned its preliminary 'A-/A-2' long- and short-term corporate credit ratings to SCA Hygiene, the hygiene company that Svenska Cellulosa Aktiebolaget (SCA) intends to spin off from the group. The outlook is stable.

At the same time, we assigned our preliminary 'K-1' short-term Nordic national scale rating to SCA Hygiene.

We are also assigning our preliminary 'A-' issue rating to the approximately €1.9 billion senior unsecured notes issued by SCA, once SCA transfers them to SCA Hygiene and they become its senior unsecured obligations.

We understanding that SCA intends to spin off SCA Hygiene once it receives shareholders' approval--the vote will take place at the annual general meeting in April 2017. In the meantime, SCA Hygiene will exist as part of the group, and SCA will only transfer its existing bonds to SCA Hygiene if bondholders express consent. Additionally, during this transition phase, SCA will still offer a direct guarantee on the bonds and continue to own 100% of SCA Hygiene. If the spin-off is approved, SCA Hygiene will be independent from SCA, and we will convert our preliminary ratings on the company to final ones. At that point, there will be no more rated debt at SCA. Until the conclusion of the spin-off, we will continue to rate SCA on the basis of the current group credit profile that includes both the forest and the hygiene divisions.

We base our preliminary ratings on SCA Hygiene on SCA's group credit profile post spin-off.   SCA Hygiene's business risk profile is supported by the group's strong market positions, stable profitability, limited product substitution risk, and positive demand growth prospects. Our assessment reflects the group's leading market positions in tissue (consumer and away-from-home) and personal care products (primarily baby diapers as well as feminine hygiene and incontinence products). These products are characterized by stable end-user demand in mature markets and have very good growth prospects in emerging markets as disposable incomes and living standards improve. SCA has strong market positions in most markets and is the clear market leader in incontinence products. We expect the group will maintain an adjusted EBITDA margin in the range of 16% in the next years.

SCA Hygiene's financial risk profile is supported by the hygiene products division's track record of healthy and steady cash generation. We believe that the separation of the hygiene business from the forest products business reduces and stabilizes capital expenditures (capex) needed. We expect SCA Hygiene's capex will be about 6% of total sales moving forward. We believe that SCA Hygiene's ability to generate stronger free operating cash flow counterbalances the fact that large land and forest assets are going to remain in SCA's scope. We understand that SCA continues to be interested in external growth opportunities, and we assume that the size of potential acquisitions will be commensurate with maintaining adjusted debt to EBITDA at about 2.5x and fund from operations (FFO) to adjusted debt above 30%.

The stable outlook on SCA Hygiene reflects our expectation that it will slowly improve profitability in the next two years on the back of increased focus on the hygiene activities. We expect that SCA Hygiene will be less capital-intensive than SCA pre-spin-off and consequently more cash-generative. Furthermore, we expect SCA Hygiene will maintain credit metrics near current levels, with an adjusted FFO-to-debt ratio of at least 30% and debt to EBITDA of about 2.5x.

We consider an upgrade is unlikely over the next few years due to SCA's growth focus, which is likely to limit any pronounced improvement in the group's financial risk profile. However, we could consider a higher rating if the group's credit metrics improved significantly over an extended period, for example, FFO to debt of above 45% and debt to EBITDA of below 2x.

We could consider a negative rating action if SCA were to diverge materially from its established revenue and profitability trends due a significant deterioration of its market position in key markets and products that translates in lower revenues and operating margin. This could trigger a review of the business risk profile and would probably also affect the financial ratios and the financial risk profile assessment. An aggressive financial policy that leads to increased financial leverage, due to large debt-funded acquisitions or unexpectedly large shareholder distributions, and pushes FFO to adjusted debt below 30% and the debt to EBITDA above 2.5x on a prolonged basis could also trigger a negative rating action.


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