(Norway)--May 19, 2009--Standard & Poor's Ratings Services lowered its long-term issuer credit ratings on Norway-based forest-product company Norske Skogindustrier ASA (Norske Skog) to 'B+' from 'BB-'. At the same time, the 'B'
short-term rating was affirmed. The outlook is negative.
The rating action reflects Norske Skog's weak operating and financial performance, primarily due to deteriorating operating conditions such as falling newsprint and magazine paper demand. Norske Skog's credit measures have now fallen to levels which are inadequate for the previous 'BB-' rating.Furthermore, we expect the currently challenging conditions to prevail over the near term in tandem with the global economic downturn. In our opinion,demand is likely to remain weak, putting pressure on selling prices. Our
revised financial forecast for Norske Skog incorporates lower volumes,stretching into 2010, with further pressure on the company's profitability and credit measures as a result. This is reflected in the negative outlook.
Demand for newsprint and magazine paper in most of Norske Skog's main markets has fallen rapidly as a result of the economic downturn. Inventory management throughout the downstream value chain has most likely accelerated
the drop in volumes, although it is too soon to gauge the magnitude of this effect. Most likely, substitution to other media has also contributed to the drop in volumes. We expect an underlying drop in demand of 15%-20% in 2009 and
expect this to be the overriding rating factor in the sector over the near term. Visibility is currently poor, and prospects for 2010 are, in our view,linked to both macroeconomic and structural factors, with considerable
downside risk.
For the 12 months ended March 31, 2009, Norske Skog's adjusted operating margin was about 10.9% compared with 12.3% in the corresponding previous period. Despite reduced debt levels, adjusted funds from operations to debt in the period declined to about 9.2% (11.2%). At the current rating level, we expect Norske Skog to achieve a sustainable ratio of 10%-15%.
We expect Norske Skog's operating and financial performance throughout 2009 to remain under pressure due to lower demand across most geographic segments. Positively, discontinued dividends, lower input costs and capital expenditure pave the way for meaningful free operating and discretionary cash flow generation in our financial forecast base case in both 2009 and 2010,allowing for further adjusted debt reductions. This is a supporting factor for the ratings. We expect Norske Skog and other large producers to continue to curtail production capacity, and make further permanent closures to improve operating rates and defend selling prices.
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