Moody’s may upgrade Smurfit Kappa credit rating on WestRock deal

Smurfit Kappa’s credit rating has been put on review for a potential upgrade by Moody’s in light of the cardboard box maker’s deal to buy US rival WestRock.

Moody’s said that while the almost 50:50 tie-up would increase the debt burden of Smurfit Kappa – which would be renamed Smurfit WestRock – it would result in a more geographically diversified business. Smurfit Kappa expects the combined earnings of the groups to improve as about $400 million (€374 million) of annual cost savings are targeted in the first year after the transaction is completed.

Smurfit Kappa is currently rated Baa3 by Moody’s. This is the lowest investment-grade rating at the agency and is nine rungs below its top-notch AAA rating. WestRock is rated one step higher, even though it has a higher debt burden, relative to earnings.

Smurfit Kappa’s €3.17 billion net debt stood at 1.4 times the group’s earnings before interest, tax, depreciation and amortisation for the 12 months to June, compared with WestRock’s ratio of 2.5 times on its $9.46 billion net borrowings.

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The combined debt ratio of the two companies, based on June figures, stands at 2.3 times. The combination is expected to close in the second quarter of next year, subject to approvals from shareholders and competition authorities.

“The combined entity will be the largest integrated corrugated and consumer packaging producer in the world with $34 billion in sales on pro-forma basis,” Moody’s noted. “Its regional and product diversification will also improve compared to SKG stand-alone position with 54 per cent of revenue coming from North America, 34 per cent Europe and 12 per cent Latin America going forward.”

However, benefits from an improved geographic spread will be partly offset by “weaker credit metrics” as a result of the higher debt ratio.

“Our rating review will also focus on the likelihood of obtaining regulatory and shareholder approvals,” it said. “We would expect that a potential upgrade would be limited to one notch upon conclusion of the review.”