Jaco Visser
Sappi, the world’s largest maker of glossy paper, plans to sell bonds to refinance debt even as yields on existing securities rise as it retools mills from South Africa to the US to produce pulp used in clothing, it emerged on Wednesday.
The company would raise at least R1 billion, chief executive Ralph Boettger said last month. Yields on Sappi’s euro debt due April 2018 climbed 87 basis points from a record low on January 14, reaching 5.4 percent on Wednesday.
Rates on similarly dated euro bonds of competitor Stora Enso advanced 45 basis points to 4.3 percent. South African companies’ dollar-bond yields have added 10 basis points in the period, JPMorgan Chase indexes show.
“Sappi is hoping to achieve a more competitive interest rate in the bond market,” Mohamed Kharva, a Cape Town-based analyst at Nedbank, said.
The company, which is also the world’s biggest maker of dissolving wood pulp, is selling debt to take advantage of the lowest South African interest rates in more than 30 years, which have spurred an increase in bond issuances by companies.
Sappi has to repay R1bn of bonds on June 27. Yields on the debt have climbed to 6.32 percent since reaching a record low of 5.66 percent on July 19. Rates on the South African rand bonds due August 1 have increased 66 basis points, or 0.66 percentage points, to 5.02 percent.
The company is spending $540 million (R4.9bn) converting parts of its paper mills into plants that make the pulp, used to produce goods from sports clothing to pills and cellphone screens.
Sappi is betting on the product to increase profit and allow it to resume dividend payments, which it stopped in 2008 as it struggled with a high debt burden amid weakening paper sales in Europe.
Debt sales by companies in Africa’s biggest economy, excluding those by financial institutions, rose to $1.4bn in the first quarter from $1.06bn a year earlier, according to data compiled by Bloomberg.
“We can confirm that we are busy finalising the refinancing,” Sappi’s head of corporate affairs Andre Oberholzer said.
“We already use banks for other lines of finance. The bond market provides an additional avenue.”
The wood-pulp conversion projects at the Ngodwana mill in Mpumalanga and the Cloquet facility in Minnesota should be completed by the end of the fiscal third quarter in June, raising Sappi’s output of the pulp by about 40 percent to more than 1.3 million tons a year, Oberholzer said.
“Our global share of the overall dissolving wood-pulp market for 2012 was 14 percent and of the viscose staple-fibre market was 20 percent. These are set to increase once our additional capacity comes online,” Oberholzer said.
Sappi, which returned to profitability in the year to September, said on February 6 that profit fell 62 percent in the fiscal first quarter because of lower paper and pulp prices.
The company derived 25 percent of its sales from southern Africa in the year to September. The rand has depreciated 8.6 percent against the dollar this year, the worst performance among 16 major currencies tracked by Bloomberg after Japan’s yen, which has lost 9 percent.
Sappi’s stock dropped 7.1 percent in the first quarter, making it the worst performer in the 25-member Standard & Poor’s global timber and forestry US dollar index behind Golden Agri-Resources, the world’s second-biggest palm-oil producer. Mondi was the best performer, rising 34 percent.
As consumers turned from magazines and newspapers to computers and cellphones to consume media, Sappi’s move away from paper made sense, Kharva said.
“For them to increase exposure to dissolving wood pulp is a good diversification strategy due to it being a growth market unlike graphic paper, which is in structural decline,” he said.
Sappi shares fell 3.07 percent to R28.40 on the JSE yesterday. – Bloomberg