Standard & Poor's rating on Jefferson Smurfit Corp (JS Corp) remains on credit watch as a result of the planned merger with Stone Container Corp. Stone has been removed from credit watch as that company's outlook is considered to be stable by Standard & Poor's (S&P), the credit rating agency.
If the merger goes ahead, Standard & Poor's intends to assign its B+ corporate credit rating to the new grouping, Smurfit-Stone Container Corp, and lower its rating on JS Corp. After the merger, Stone Container Corp and JS Corp, will remain separate legal entities with separate financing arrangements. JS Corp's senior unsecured debt rating will be lowered to B-, reflecting the significant amount of secured debt in its capital structure.
Jefferson Smurfit Group, which will own 33 per cent of SmurfitStone has a rating of A-. The rating, S&P said, reflected an about average business position within cyclical containerboard markets, narrow product focus with a high degree of operating leverage and very high debt levels.
Smurfit-Stone will have between 17 and 18 per cent of the annual US paperboard capacity of more than seven million tons and pro-forma revenue of more than $8 billion (£5.3 billion).
Its cost position, according to S&P, should improve somewhat over time with the realisation of more than $350 million in expected annual operating cost reductions following the merger. "However, [the] Asian financial turmoil and a strong US dollar have sharply reduced exports, leading to very weak pricing for most of the company's products." S&P does not expect any meaningful price recovery before mid-1999 at the earliest.
The credit agency describes the financial profile of the merged group as "very aggressive", noting that the pro-forma debt will exceed $7 billion (including capitalised operating leases).
The credit ratings assume that cash proceeds of more than $1.5 billion will be raised over the next year from the sale of non-strategic assets and used for debt reduction. S&P concludes significant upside earnings and cash-flow potential, based on the high degree of operating leverage, are likely to be overshadowed for at least the next year by continued weak containerboard market conditions.
