Norske Skogindustrier Sells Remaining Brazilian Operations, a Credit Positive
Last Wednesday, Norske Skogindustrier ASA (Caa2 negative), a producer of newsprint and magazine paper,
said it had agreed to sell its remaining 49% shareholding in its Brazilian Pisa mill to Papeles Bio Bio S.A.
(unrated) for $37 million, and discontinue its remaining South American paper production. The
transaction is credit positive for Norske Skog because it intends to use the disposal proceeds to strengthen
its liquidity and to reduce its high net debt leverage, factors that outweigh the reduction in the scale and
diversity of its operations.
The proceeds of the transaction together with the NOK820 million ($133 million) of cash that Norske
Skog had on its balance sheet as of September 2013, the recently implemented securitization facility of
NOK250 million ($40 million) and proceeds from selling its Thailand asset for $33 million in October
should help the group meet debt repayments of NOK948 million ($154 million) over the next 12 months
(assuming at least breakeven free cash flow generation). Nonetheless, Norske Skog's liquidity buffer will
remain very tight given that it needs some of the cash to run operations.
Under the deal, Papeles Bio Bio has agreed to renegotiate the terms with an accelerated timeline to acquire
the remainder of Norske Skog's shares in the Pisa mill. Norske Skog did not disclose details of the financial
effect of these transactions on its sales and profitability. The Pisa mill has a total newsprint production of
approximately 170,000 tons, and is one of four newsprint mills in South America.
The credit positive transaction will not trigger a change in the group's ratings because of its continued high
leverage as measured by debt/EBITDA, which was above 30x as of September as adjusted by Moody’s, and
significantly declining profitability in the 12 months ended September 2013. We expect gradual
improvements in Norske Skog’s profitability in 2014 owing to recent capacity closures that have resulted in
a temporary market demand-supply rebalancing and consequently, higher capacity utilization rates that
should support paper prices by mitigating high input costs for raw materials such as pulp and recovered
paper. However, as a result of weak demand in its European domestic market, where it generates
approximately two thirds of its sales, benefits of capacity closures can disappear quickly, leaving uplift in
profitability dependent on additional cost-efficiency measures.
Norway-based Norske Skog is among the world's leading newsprint producers with production in Europe,
Asia and Australasia. The company also produces magazine paper in Europe. In the 12 months ended
September 2013, Norske Skog recorded sales of around NOK13.5 billion (approximately $2.2 billion)