EU BASIC INDUSTRIES: UPM-Kymmene (UPMFH): Sappi JV       

A positive development; helps leverage and rating. Levels trade reasonably tight, so we do not anticipate spreads moving.

• UPM has announced plans to form a graphic paper JV with Sappi.
• Cash payments will rebalance ownership to 50:50, with UPM accounting for the JV using the equity method, deconsolidating debt.
• We see proforma pension adjusted leverage improving ~0.4x. It confirmed it expects a positive impact on its leverage and margins.
• Moody’s recently put UPM on outlook negative, with its leverage measure 1.1x above threshold. It explicitly mentioned reduction of exposure to graphic paper, which is in structural decline, as a potential positive factor.
• The JV will raise its own debt and target 2.5x initial net leverage.