Ratings agency Moody's Investors Service has upgraded the corporate family rating of JSE-listed pulp and paper company Sappi to Ba2 (stable) from Ba3 (positive), owing to the company’s intention to repay its $400-million bond, due in 2017, from generated cash.

The ratings agency further noted that Sappi’s probability of default rating was adjusted to Ba2-PD from Ba3-PD.

Moody's lead analyst for Sappi, Martin Fujerik, noted that the upgrade reflected Sappi’s aim of achieving a track record of “solid operational results”, as well as the role of Sappi’s management in strengthening the company's balance sheet, including meeting its capital structure target of below twice the reported net leverage.

The decision was welcomed by Sappi CEO Steve Binnie, who said that the ratings upgrade was further confirmation of Sappi’s success in implementing its strategy.

“We have achieved our debt-reduction targets a year early, paying down some $800-million over the past three years,” said Binnie, adding that the company had declared its first dividend since 2008.

“Our finance costs have materially reduced and our overall earnings before interest, taxes, depreciation and amortisation (Ebitda) margin has improved to 15.6%,” he added.

Binnie said that the rating also came on the back of Sappi’s efforts to reposition the group to continue delivering strong results, along with its dissolving wood pulp business being sold out and its speciality and packaging papers segment growing by 15% in Europe and 43% in North America.

“Cost-reduction and market-share gains have more than offset any general decline in demand in our graphic and printing paper segment. We have a firm commitment to maintaining our net debt-to-Ebitda ratio at below double and to continued dividend payments. The actions we have planned will ensure that we further increase contributions from our high-growth and high-margin businesses while keeping costs under tight control,” Binnie highlighted.

Concurrently, Moody's upgraded the ratings of instruments issued by Sappi's guaranteed subsidiary, Sappi Papier, including senior unsecured notes (due in 2017, 2022 and 2023) and a revolving credit facility (due in 2020) to Ba2 from Ba3, as well as senior unsecured notes (due in 2032) to B1 from B2. Moody's also changed the outlook on all ratings to stable from positive.

The ratings agency noted that the action recognised further improvements in Sappi's credit metrics, which have by now reached levels commensurate with a Ba2 rating, such as Moody's adjusted Ebitda margin of around 14%.

Moody's expects that Sappi's specialty paper and DWP businesses will continue to grow in 2017, thus offsetting continuing decline in graphic grade paper. It forecasts Ebitda for the 2017 financial year at or slightly below levels achieved this year. “This should enable Sappi to continue generating free cash flow at around mid-single-digit percentage of adjusted debt, even with a reinstated dividend payment of around $60-million, which was triggered by Sappi reaching its net leverage target,” it stated.