Pulp & Paper News

Moody's places Ence's Ba3 CFR under review for downgrade after weak 1H 2014 operating results

FRANKFURT, Germany , Aug. 29, 2014 (Press Release) - 

Moody's Investors Service, ("Moody's") has today placed under review for downgrade ENCE Energia y Celulosa; S.A.("ENCE")'s Ba3 Corporate Family Rating (CFR), the Ba3-PD Probability of Default Rating (PDR) and the B1 rating on the company's senior secured bonds.

The review was prompted by very weak operating results in H1 2014 predominantly driven by regulatory changes in the Spanish energy markets. During the review, the agency will evaluate additional details of the company's business recovery plan which is going to be implemented to offset the changes in the Spanish energy markets.


ENCE's Ba3 CFR and stable outlook initially assigned in January 2013 was based on the expectation that ENCE would maintain acceptable credit protection measures for its rating, despite anticipated pricing pressure and moderate negative free cash flow generation, as indicated by debt/EBITDA as defined by Moody's below 3.5x and Retained Cash Flow / debt in the mid to high teen percentages. During H1 2014, ENCE's electricity sales reduced by 44% compared to the prior year due to regulatory changes in the Spanish energy market, exacerbated by a 15% decline in pulp sales due lower volumes and pricing as a result of global demand-supply imbalances in anticipation of sizeable new pulp capacities coming on stream between 2014-15. Including retroactive regulatory and adjustments for one-off effects related to impairment losses, ENCE's debt/ EBITDA per June on a 12 months rolling basis (LTM) and as adjusted by Moody's increased to 6.1x while RCF/debt declined to 11.9%. This is no longer commensurate with the assigned rating level. At the same time, the company's good liquidity including around EUR127 million of cash, access to EUR60 million under its factoring lines and an undrawn EUR90m super senior revolving credit facility (not subject to maintenance covenants), should provide sufficient funding in support of the envisaged measures to turnaround the business. At this stage, Moody's expects that a possible downgrade, if any, would be limited to one notch of the long term rating.


During 2014 two regulatory changes in Spain occurred with retroactive effect from 14 July 2013, including (i) a new economic regime for renewable energies that also eliminated payments of efficiency and reactive energy bonuses as well as (ii) a new regulatory framework for renewable energy sources with remuneration parameters that eliminated a specific tariff for energy crops, implemented a maximum number of hours with right to premium prices, and reduced premium prices paid for generating electricity with biomass and gas including renewable energy cogeneration with black liquor(which is a byproduct of the cellulose process). In addition, two regulatory changes had already become effective from 1 January 2013, including a new general tax imposed on electricity output and a "green cent" tax on the consumption of fossil fuels. Including all the regulatory changes in the last two years, the company has estimated an annual negative impact of -EUR59 million based on the company's reported pro forma 2012 EBITDA of EUR141.3 million.

In May 2014, ENCE's management presented a broad recovery plan to stakeholders aiming to regain up to EUR79m EBITDA by 2016 through measures of cost management and a total EUR127 million of investments between 2014 and 2015 aimed at improving operational efficiency and restructure ENCE's production mix. During its review, Moody's will consider a number of additional key details including timing of the investment plan and the decision about the future of the company's Huelva pulp mill which could substantially vary the size of required investments under the new business plan and the associated execution risk.

On Review for Downgrade:

..Issuer: ENCE Energia y Celulosa, S.A.

Probability of Default Rating, Placed on Review for Downgrade, currently Ba3-PD

Corporate Family Rating, Placed on Review for Downgrade, currently Ba3

Senior Secured Bond/ Debenture Feb 15, 2020, Placed on Review for Downgrade, currently B1

Outlook Actions:

..Issuer: ENCE Energia y Celulosa, S.A.

Outlook, Changed To Rating Under Review From Stable

Given that the rating is under review for downgrade, an rating upgrade currently is unlikely. The rating could be downgraded if ENCE's debt/EBITDA would remain above 3.5x and RCF/debt ratio below the low teen percentage for an extended period of time,

The principal methodology used in this rating was Global Paper and Forest Products Industry published in October 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

With sales of EUR 754 million in the last twelve months ending June 2014, ENCE, headquartered in Spain, is a leading European producer of hardwood pulp and also has sizable alternative energy operations in Spain. ENCE has production capacities of about 1.3 million tonnes of bleached eucalyptus kraft pulp at three mills in Spain, generating about 75% of group sales. In its energy division, the group operates five co-generation and three generation biomass energy plants, generating about 24% of group sales. ENCE also has some forestry operations, which generated the residual 1% of group sales in the last twelve months ending June 2014.


For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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