Sappi’s debt costs increase as eurozone falters

SAPPI, the world’s largest manufacturer of glossy paper, is facing higher borrowing costs as the eurozone’s economy contracts, curbing demand for its products.

Yields on its only eurodenominated debt, due in April 2018, have surged 80 basis points since May 9, when the company said second-quarter profit plunged 88% to $7m from a year earlier, to 5.44% on Wednesday.

Moody’s Investors Service cut its outlook on Sappi’s rating of Ba3, the third-highest junk level, to stable from positive last Friday because of the profit drop and “ongoing difficult trading” in Europe and SA.

“A further deterioration of the market conditions in Europe can put Sappi under pressure both from a margins perspective and from a liquidity perspective,” Ana Luisa Aguiar, a credit analyst at the Lisbon-based assetmanagement unit of Banco Portugues de Investimento, which owns Sappi bonds, said this week.

Sappi’s European operation reported an operating loss of ¤1m in the three months through March from a ¤37m profit a year earlier and the company expected the market to be weaker than it previously thought, it said.

The company, which is also the world’s biggest producer of dissolving wood pulp that is used to make sports clothes and lipstick, will add 500,000 tons of capacity to produce the material in the period through September.

Sappi is banking on the conversion of two paper mills, Ngodwana in SA and Cloquet in Minnesota, to increase revenue and profit margins. Expansion into dissolving wood pulp and cost-cutting in Europe should support higher margins and earnings growth in the final six months of the financial year, said Ms Aguiar.

The lowest interest rates in 30 years in Africa’s largest economy lured the company to issue R1.5bn of bonds in April at a blended yield of 7.6% to repay R1bn in notes due on June 27 and finance the conversion of the Ngodwana mill, the company said on May 9. Sappi has $1.87bn of bonds outstanding, excluding the notes maturing next month, according to data compiled by Bloomberg.

The company does not intend to substitute eurodenominated debt for bonds in rand because it prefers to raise in the currency of the country where the funds are needed, Andre Oberholzer, Sappi’s head of corporate affairs, said yesterday.

“We expect that the group will, at worst, break even at the net profit excluding special items level for the full year,” Mr Oberholzer said on Monday. Bloomberg