Moody’s downgrades European paper companies on unsolved structural concerns

The European paper and forest products sector is still being confronted with continued very low demand, prompting a number of rating actions in the first nine months of 2009, Moody's Investors Service said in a new report. However, while the rating agency still considers the impact of cyclicality on operating performance contraction in its ratings, sector ratings remain under pressure due to unsolved structural challenges in the industry.
"Sector ratings remain under pressure, as structural challenges due to imminent overcapacity persist throughout the cyclical downturn and continue to be potential drags on companies' longer-term debt repayment capabilities and hence on their credit ratings," said Christian Hendker, analyst in Moody's Corporate Finance Group.
"Nevertheless, Moody's continues to factor the underlying cyclicality of the paper sector into its ratings, as most rated companies currently have weaker credit metrics compared to those expected for through-the-cycle credit profiles."
However, Moody's understand that these weaker metrics are to some extent a result of a severe demand contraction in H1 2009. In light of weakening cash flow generation due to structural and cyclical elements, the robustness of a company's liquidity typically determines the extent of time that a company can withstand downward rating pressure, as well as Moody's ability to rate through a cycle.
Moody's recognises that continued aggressive capacity reductions could be the basis for healthier pricing levels and a longer-term cash flow recovery for the sector. However, if capacity curtailments and restructuring activities are not sufficient to restore the supply-demand balance, increasing pricing pressure with continued pressure on profitability and cash flows could result and add continued downward pressure on the ratings going forward.