Norske Skog: farewell Korea!

Norske Skog is selling its two South Korean newsprint mills to Morgan Stanley Private Equity Asia and Shinhan Private Equity. The deal could well be completed just in time for 7 August 2008, when Norske Skog discloses its results for the first half of 2008. One of the mills was acquired in 1998, the other was partly acquired the following year and fully consolidated since 2005. The Korean disposal will generate $830 million proceeds for Norske Skog and will reduce the group's debt by about 25%. The mills have a 1-million-tonne newsprint paper production capacity, that is about 2/3 of Norske Skog's Asian newsprint capacity or just under 1/4 of the entire group's newsprint capacity. No material disposal gain or loss will result. In the third quarter of 2006, Norsk Skog had recorded a provision of NOK 1 billion for a 1,000-headcount reduction and a 180,000-tonne capacity reduction in Korea.

In January 2008, the largest shareholder of Norske Skog was Unionen, with almost 6% of the capital. Owned by activist shareholders, Unionen then made a rather protectionist call that Norske Skog should sell assets outside Norway to keep its home-based mills afloat, for instance by splitting the group into two geographical poles. This was a strong objection of the pro-Asian strategy that had been pursued since Norske Skog took minority stakes in what are now majority- or fully-owned Norske Skog Asian operations.

For now, the group is holding on to its smaller Chinese assets, and management probably still sticks to its belief that long-term prospects there are "bright", despite the current over-capacity situation.

Kemira's full-year profits and Coatings

Finland's chemicals group Kemira has decided to spin off Tikkurila, its Coatings division. This is to take place gradually next year, in order to try and cash in any extra value that could result from a separate valuation of this business on a stand-alone basis. Kemira will focus on chemicals that relate to water treatment and to the paper industry. In the first quarter of 2008, Tikkurila was Kemira's most profitable division, with a high-single digit operating profit margin, compared with only 4% for the whole group. It had full-year sales of €625 million in 2007.

At the same time, Kemira warns on its full-year profit outlook, only a few hours after some its major customers (Stora and UPM) did the same.

Ahead of the current CFO's retirement in 2009, Kemira announces that its new CFO will be Jyrki Mäki-Kala, with effect from October 2008. Jurki was head of Pulp & Paper at Kemira. Three existing managers have been promoted to Presidents of the new core activities: Paper, Water and Oil and Mining, respectively.

You will remember that Moody's downgraded Kemira's short-term rating to not-prime last Friday, which corresponds to a long-term rating of Ba1 or lower. Indeed, credit metrics are not particularly impressive. With net debt of over €1 billion at 31 March 2008, funds from operations before changes in working capital were only €47 million in the first quarter, and cash flows after capital expenditure were negative by €18 million (-€82 million full year 2007).

Will the Coatings move help stem the trend? Only if only a small portion of the shares are distributed "for free" to Kemira shareholders and the valuation multiple achieved helps to strengthen credit metrics.

Paper sector outlook

Early this morning, Finland-based Stora Enso, Europe's largest paper producer, warns that its second quarter operating income will be half the €223 million generated in the same period last year. Main culprits: higher pulp and oil prices, and factory stoppages for maintenance and due to technical problems. Shortly thereafter, its compatriot UPM-Kymmene also warned that it now expects 2008 operating profit to be lower than in 2007 for similar reasons, despite having expected a flat year-on-year trend as recently as early 2008. Stora and UPM will both release their second quarter results on 24 July.

Yesterday, Standard & Poor's released an industry report card on the US forest products sector. Pam Rice and her colleages issued a rather gloomy, if predictable, comment: "two-thirds of the rating actions we took in the past three months were negative, and now almost 40% of the companies we rate have negative outlooks or are on CreditWatch with negative implications, with just over 50% having stable outlooks. As a result, any material adverse deviations from our base case assumptions will likely lead to more downgrades." At the end of May, Standard & Poor's made similar comments about the European paper sector: despite the sector-wide downgrades of October 2007 and April 2008, over half of Europe's forest products companies still have negative rating outlooks, "indicating a high likelihood of further negative rating actions."

All this echoes Moody's global paper and forest products report of 1 April 2008: "many companies in the printing and writing paper, paper packaging and wood-based building products sectors are expected to experience negative rating pressure" and "over the past year, approximately 75% of rating actions in the paper and forest products industry have been negative, constituting either outright downgrades or negative outlook changes."

Let me look at the lowest-rated names. If a company is already rated, say, B- or B3, further downgrades will presumably require a further deterioration in liquidity. S&P's liquidity snapshot of 16 May 2008 is particularly helpful in that respect. M-real will report its second quarter results on 23 July 2008. It is rated B-/stable by S&P and B3/negative by Moody's. At 31 March 2008, €197 million of its long-term interest bearing liabilities were due by the end of the year, but its €500 million syndicated credit facility (2009) was still completely available, so no imminent liquidity crisis can reasonably be expected in 2008. Lecta is rated B+/stable by S&P, but its senior unsecured debt is rated B-. It was downgraded by Moody's a week ago, to B1 corporate family rating and B3 senior unsecured debt rating, with a stable outlook. Both agencies could well change the rating outlooks on Lecta to negative as the year progresses. Moving up the rating scale, Norske Skogindustrier ASA (BB-/Watch Negative and B1/negative) is the best candidate for (more) downgrades, especially by S&P. It reports on 7 August 2008, so watch rating news around that date.

Friday 13 June 2008

"Is Lehman the next Bear Stearns?", all the media ask. Hmm... I wonder whether they are trading as much as they used to. For, from what I understand, reduction in trading volumes because of counterparty risk concerns was the last "red flag" at Bear, before the Fed and JP Morgan came to the rescue. Now, Lehman is replacing some of its top executives: I am not convinced such measures bring much when the slide is already slippery.
In the freight sector, I am intrigued by the launch of new derivatives based on the Baltic Dry Index. Somehow it reminds me of the CBOT evolution: from farmers or orange-growers and their customers to purely-financial punters. Remember "Trading Places"? In freight, are these instruments new toys with which to burn one's fingers?Kemira Oyj, a Finnish chemicals group that counts paper companies among its main customers, has just announced that it would raise its prices by as much as 25% to try and offset higher raw material and energy costs. A week ago, it received a €100 million loan from the EIB to support its R&D activities. Sounds positive doesn't it? Perhaps, but not enough in Moody's eyes: they lower the group's short-term rating, which had been on review for downgrade since 17 March 2008, to Not-Prime, from P-3. Unfortunate timing, but presumably correct decision, as financial difficulties among customers are likely to hinder price-raising efforts (37% of 2007 revenues from Pulp & Paper produts and 22% from Coatings, plus 25% from Water treatment products, which, in turn, are frequently used in the paper industry).
This follows Moody's downgrades two days ago of Sappi, the South African paper company (to Ba2/stable corporate family and debt ratings), and of the French coated fine paper company Lecta SA (to B1/stable corporate family and B3/stable debt ratings).
M-Real will not sell its Reflex mill to Arjowiggins. The companies had envisaged the deal in October 2007, but the European Commission, in its capacity of M&A spoilsport, decided last week that the transaction could only take place if Arjowiggins sold off Reflex's carbonless and digital imaging activities. Anyone else interested in Reflex?