Hygiene Products Focus Drives Credit Risk Lower at SCA

Svenska Cellulosa AB’s focus on hygiene products has helped the Swedish company skirt the epidemic that’s gripped the rest of the Nordic paper industry.

Credit-default swaps insuring SCA’s five-year bonds fell to 77.2 basis points on Feb. 24, the lowest in almost nine months, with investors predicting a 6.8 percent risk the Stockholm-based company will be unable to pay its debt. That compares with 26 percent for UPM-Kymmene Oyj and 27 percent for Stora Enso Oyj, the two biggest paper companies in the region.

SCA agreed in January to sell most of its packaging operations to DS Smith Plc for 1.7 billion euros ($2.3 billion), two months after buying Georgia-Pacific LLC’s European tissue operations for 1.32 billion euros to add brands including Lotus. About 80 percent of SCA’s business will be in hygiene after the packaging sale goes through, and the company plans to push deeper into the industry with more acquisitions.

“SCA is becoming more and more a consumer products company than a traditional forest company,” said Riikka Tuominen, a credit analyst at Nordea Bank. “A growing share of revenue comes from tissue and personal hygiene, where the demand is fairly stable and even growing in emerging markets, so that’s good for its credit profile.”

Credit Rating

SCA, which is Europe’s biggest private forestry owner, makes Tempo tissues and Libero diapers, as well as printing paper and container board. Its latest acquisition brought SCA’s European market share to 35 percent in consumer tissue, and 30 percent in tissue sold to hotels and restaurants.

Moody’s Investors Service rated SCA’s Baa1 on Feb. 22, citing the “inherent demand stability” in the growing hygiene business. Standard & Poor’s rates SCA BBB+, the third-lowest investment grade rating and the same level as Moody’s.

The European paper industry has been in a state of decline for years, as demand for newspapers and magazines drops and capacity shifts to Asia, curtailing export opportunities. European paper volumes will probably fall 5 percent in 2012, while paper prices are set to decline 3 percent, Moody’s said Feb. 20 in a report.

“We have a different creditworthiness than these other names” in the Nordic forest industry, said Carl-Axel Olson, SCA’s treasurer. “Thanks to our increasing focus on hygiene products, the business risk is seen as developing in a positive direction.”


SCA rose as much as 0.5 kronor, or 0.4 percent, to 118.7 kronor in Stockholm, and traded at 118.7 kronor as of 10:44 a.m. SCA has gained 16 percent this year, valuing the company at about 83.3 billion kronor ($12.6 billion). UPM and Stora have both gained 22 percent, while Swedish paper and pulp maker Holmen AB has dropped 2.9 percent.

SCA derived just over half its sales from paper, pulp and packaging in 2004 and has steadily grown its hygiene business since then. In 2007 it bought Procter & Gamble Co.’s European tissue operations including the Tempo brand. Last week, SCA offered 1.9 billion kronor for Taiwan’s Everbeauty, which manufactures and markets baby diapers and incontinence products.

The company boosted its operating margin at the personal care unit to 12.1 percent in the fourth quarter, from 11.5 percent a year earlier. By contrast, the margin at the forest-product division, which makes publication paper and pulp, fell to 10.6 percent from 13.8 percent.

Culling Jobs

SCA’s transformation has included large-scale job cuts. The company said in October it will eliminate 2,000 jobs as part of a cost-saving plan at its hygiene and packaging units. That followed a move in 2009 to close plants and cut 2,200 European packaging jobs. SCA employs about 45,000 people globally.

Stora, the leading papermaker in Europe, has eliminated more than 6,000 jobs in the past five years and cut mills to stem falling demand. Norske Skogindustrier ASA, the Norwegian maker of newsprint paper, has reduced its workforce by more than 4,000 since 2005.

Norske Skog, which makes only newsprint and magazine paper, hasn’t reported an annual profit since 2004. The company is closing its mill in Follum, Norway, leaving it with 13 paper plants around the world. While it’s not planning to shut more mills, it will “evaluate the future” of its unprofitable plant in Renkum, Netherlands, spokesman Carsten Dybevig said.

Credit-default swaps insuring 10 million euros of Norske Skog’s debt for five years cost 3 million euros upfront and 500,000 euros a year, signaling a 75 percent probability of default within that time.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

“Norske Skog has never defaulted on any loan in history, and we won’t do it in the future either,” Dybevig said. “We will fix our profitability, and improve our position when it comes to capacity, cost and long-term debt.”

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