Sappi Favors Bondholders to Shares in Offer: South Africa Credit

Sappi Ltd., the world’s largest producer of glossy paper, is rewarding bondholders with proceeds from $700 million of new debt sales while stockholders wait for the resumption of dividends eliminated three years ago.

Last month’s sale is financing a tender offer for the Johannesburg-based company’s 12 percent dollar bonds and 11.75 percent euro securities, both due in 2014, at a premium of as much as 6.75 percent. Yields on the new 2017 notes dropped 32 basis points since their debut to 7.31 percent while those on the 2019 securities fell 32 basis points to 8.07 percent, data compiled by Bloomberg show. JPMorgan Chase & Co.’s CEMBI index of emerging market industrial companies dropped 38 since Sappi unveiled the refinancing plan on June 20.

While Sappi’s efforts to extend debt maturities and reduce borrowing costs are benefiting bondholders, its decisions to shut mills, reduce jobs and suspend dividends contributed to a 68 percent drop in shares in the past five years. Sappi Chief Executive Officer Ralph Boettger plans to resume stock payouts by Sept. 30 next year, once net debt has fallen below $2 billion from $2.1 billion on March 31. The stock fell 1.2 percent to 25.70 rand at the close in Johannesburg today.

“This has been a good time for Sappi bondholders,” Conrad Wood, the head of fixed income at Johannesburg-based Momentum Asset Management, where he oversees the equivalent of $8.5 billion of assets, said by phone July 16.

‘Very Committed’

Sappi’s sale last month included $400 million of its July 2017 notes with an annual coupon of 7.75 percent and $300 million of the June 2019 debt at a coupon of 8.375 percent.

The debt buyback offer has attracted 56 percent of the dollar-bond investors who will get 6.75 percent above the face value of the debt, while 51 percent of the euro-debt holders accepted Sappi’s offer for a 6.63 percentage-point premium, Sappi said July 5. The company will call the debt by Aug. 6 at a 6 percent premium for the dollar bonds and a 5.88 percent premium for the euro debt.

“We’re very committed to reducing our debt and our cost of debt, with our maturity profile improving and being very nicely spread,” Boettger said in a July 16 telephone interview. “We don’t see a need for further debt raising in the short-term.”

The refinancing will save $28 million in annual interest payments, Boettger said. “This refinancing of debt is yet another step in this direction of resuming dividend payments,” he said.

Risk Improves

The cost of protecting Sappi’s debt, rated BB- by Standard & Poor’s, the third-highest non-investment grade status, for five years using credit-default swaps has dropped 155 basis points, or 1.55 percentage points, this year to 441 yesterday, according to data compiled by Bloomberg. That compares with a 3 basis-point decrease to 397 for Helsinki-based Stora Enso Oyj, Europe’s largest papermaker, rated one grade higher at BB by S&P, the data show.

Credit-default swaps on South African dollar-denominated sovereign debt, rated BBB- at S&P, have declined 58 basis points this year to 136, down from the year’s high of 219 on Jan. 5, according to data compiled by Bloomberg. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if the government fails to adhere to its debt agreements.

Corporate bond sales in South Africa have increased 53 percent this year to 61 billion rand ($7.4 billion), more than two times the 25 percent growth among emerging markets worldwide, according to data compiled by Bloomberg.

‘Sweet Spot’

“There is huge demand for corporate debt in the market with a lot of liquidity looking for higher yielding assets and so Sappi’s timing has been good,” Victor Mphaphuli, who helps manage the equivalent of $18 billion in fixed-interest investments at Stanlib Asset Management Ltd. in Johannesburg, said by phone yesterday. “It’s a sweet spot for corporates looking to raise debt.”

Yields on government rand-denominated bonds due in 2021 have fallen 117 basis points this year. They traded at 6.81 percent by 5:04 p.m. in Johannesburg, narrowing the gap with U.S. Treasuries to 533. The rand was little changed at 8.1675 per dollar, extending losses this year to 1.2 percent.

Sappi returned to profit in the second quarter from a year-earlier loss, helped by a reduction of $100 million in costs after closing its Biberist mill in Switzerland and a reorganization in South Africa, the company said on May 10. Demand in Europe, which accounted for 54 percent of sales last year, fell from a year earlier, it said.


“Sappi’s road to recovery is not a short-term game, but they have being doing what they need to do,” Sean Ungerer, an analyst at Avior Research (Pty) Ltd., said by phone from Johannesburg. “There is still some concern over how actively Sappi will need to manage its European business and that is playing on the share price.”

Moody’s Investors Service affirmed Sappi’s Ba2 rating, the equivalent of S&P, with a positive outlook, citing Sappi’s improving profitability, despite the “weak” macroeconomic environment, the ratings company said in a June 27 note.

“There is definitely a turnaround underway and investors seem to have got to grips with the concept that the company can now survive, which was an issue before its reorganization,” Mohamed Kharva, an equity analyst at Nedgroup Securities Ltd., said by phone from Cape Town. “As people see Sappi reduce debt they will increasingly buy into the story. It’s what needs to be seen to give confidence that Sappi will be able to meet targets and resume dividends.”

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