The global paper and forest product industry’s six-year-long decline in credit quality has continued in 2007, says Moody’s Investors Service in an industry update. During the year, industry participants have faced tighter liquidity conditions, a worsening slowdown in US housing construction, and, for producers in
Overall, Moody’s expects the slide in credit quality to continue, particulary for North American and European based companies.
“Negative rating pressure will persist in newsprint and mechanical papers as costs inflate and demand decreases,” says Moody’s Vice President — Senior Analyst Ed Sustar. “The wood-based building materials companies will also see negative pressure from the protracted slowdown in new home construction and weakness in remodeling business.”
Positive rating pressure, however, is expected for the market pulp and packaging segments as prices remain strong.
Moody’s also expects operating performance to continue to improve in Latin America, where major pulp investments have been completed, and for credit quality to remain stable in
New developments during the last six months have generally been to the detriment of the industry, however.
Liquidity is becoming a greater concern as many companies consume more balance sheet cash or draw down liquidity lines faster than expected as depressed margins reduce cash flow. The current credit crunch could pose a hurdle to adequate financing.
“For companies that did not take advantage of the prolonged favourable credit cycle, near-term liquidity problems could be exacerbated by restricted access to financing due to the current adverse capital market conditions,” says Sustar. “Several high-grade issuers in August found the cost of rolling over their commercial paper to be very expensive and have instead drawn on their liquidity lines for funds.”
The increased strength of the Canadian dollar, the Brazilian Real and the Chilean Peso, in turn, are causing problems for regional producers based in those countries. Companies with significant operations in
In all, Moody’s says 77% of rating actions in the period since it published its Industry Outlook in March have been either rating downgrades or negative outlook changes.
Most of the negative rating actions have been in the printing and writing segment. Moody’s also took negative rating actions on five of the six wood-based building materials companies that it rates, prompted primarily by decreased demand from the slowdown in the US housing industry.
In all, Moody’s rates 61 companies in the global forest and paper products industry, which have $86 billion in rated debt outstanding.
