Jefferson Smurfit shares have fallen sharply on the Dublin market after the packaging group had its credit rating cut by Standard & Poor's. The shares were 6 1/2 cents lower on €2.55.

In a statement, S&P said that the cut in the Smurfit rating reflected a deterioration in Smurfit's financial profile but that it expected Smurfit's finances to improve.

"Debt levels have risen over time, which, combined with a weak operating environment, has depressed Jefferson Smurfit's interest coverage to levels no longer consistent with single-'A'-minus ratings.

"Group net debt - at €1,134 million at June 30, 1999 -is higher than in previous years as a result of corporate investments, particularly the company's purchase of 20 million shares in Jefferson Smurfit Corp for US$515 million in November 1998, giving it 33% ownership of the merged Smurfit-Stone Container Corp. "Although this merger should prove beneficial to the industry by reducing capacity, it added considerable leverage to Jefferson Smurfit at a time of industry weakness," said S&P.

"The container and corrugated board markets were difficult in the first half of 1999, with a poor pricing environment and weaker industrial demand. As a result, Jefferson Smurfit's operating profit before associated income fell to €98 million from €123 million in the first half of 1998, and pre-tax interest coverage fell to 2 times.

"The first half of 1999 is likely to prove a low point in Jefferson Smurfit's cycle, and price rises have been achieved in recent months. Standard & Poor's expects Jefferson Smurfit's financial profile to recover to a level in line with the ratings over the coming years. "As well as benefiting from an upturn in the cycle, Jefferson Smurfit should gain from increased focus after restructuring its operations into a product-based framework, rather than a geographic one, and by selling noncom assets.

"Although SSCC is highly leveraged, the debt is non-recurrent to Jefferson Smurfit, and ownership is not expected to result in a drain on Jefferson Smurfit's financial resources.

"The outlook reflects Standard & Poor's expectation that Jefferson Smurfit's financial profile will improve as the industry emerges from its low point, and as the company restructures. "Standard & Poor's expects Jefferson Smurfit to follow financial policies in line with the ratings, and to achieve financial ratios in keeping with median levels for the rating categorising pre-tax interest cover of more than 4 times and funds from operations to net debt of over 35% over the cycle," S&P stated.