European paper and packaging companies are likely to step up investment after successfully reducing leverage over the past few years, according to a new report by Moody’s.
Most European pulp, paper and paper-packaging companies, including Progroup AG, Smurfit Kappa Group plc, Mondi Plc and Metsä Board Corporation, have built up financial flexibility to step up capital investments in new and existing projects without putting significant pressure on their credit quality.
As a result, Moody’s believes that merger and acquisition activity will continue to be a less attractive proposition because valuations are currently high and most market segments are already quite concentrated.
M&A activity has been fairly limited and many companies have used generated free cash flow (FCF) to repay debt. As a result, the total Moody’s-adjusted gross debt level declined by around one-third between 2012 and 2017.
Although there is scope for some companies – especially graphic grade paper producers – to make their businesses structurally stronger, the capital structures of many other companies are currently robust and it is not felt that the industry’s debt load will decline further.
A number of companies have disclosed plans to speed up investments. However, most of those investments would be largely covered from operating cash flows, so leverage would not significantly increase as a result.
“European paper and packaging companies are likely to step up investment after successfully reducing leverage over the past few years. Indeed, most firms are now operating below their self-imposed net leverage targets. As a result, any spending on new and existing projects that sticks within their current financial policies is unlikely to hit credit quality,” says Martin Fujerik, Vice President – Senior Analyst at Moody’s.