by Morningstar Credit Committee | 12 Jul 10

Morningstar is initiating credit coverage of UPM-Kymmene with an issuer rating of BB. Relatively weak credit metrics, significant secular demand headwinds, and structural challenges facing the European paper industry represent our primary concerns about UPM.
While UPM ranks among the world's largest paper producers, size and near self-sufficiency in electricity and pulp have done little to insulate the firm from secular and structural difficulties. European paper demand, already down in 2008, declined further in 2009. UPM's graphic paper volume slipped 15% in 2009 on the heels of a 7% drop in 2008. Making matters worse, European paper producers were less aggressive than their North American counterparts in efforts to permanently shutter capacity, compounding the ill effects of diminished fixed-cost dilution with weaker pricing power. This is a consequence, in part, of the industry's relatively slower pace of consolidation, a structural impediment that will continue to drag on UPM's profitability as European graphic paper demand continues its secular descent.
UPM ended 2009 with total debt of EUR 4.5 billion, a sum roughly in line with the debt load the company has carried for the past several years. Poor demand conditions across the company's product portfolio translated to relatively weak credit ratios in 2009. Debt/EBITDA rose to 4.9 times, up from 4.1 in 2008 and an average of 2.9 over 2005-07. Coverage also weakened, as EBITDA/interest contracted to 4.4 times from 5.9 in the prior year and an average of 7.9 over 2005-07. While we expect credit metrics to improve as the firm benefits from a cyclical rebound in demand, we do not anticipate improvement to levels that would merit assigning an investment-grade credit rating to UPM.

TORONTO STAR - CANADÁ - 12 julio 2010