SAPPI, the world’s largest maker of glossy paper, plans to sell bonds to refinance debt even as yields on existing securities rise as the company retools mills from South Africa to the US to produce pulp used in clothing.
The company will raise at least R1bn, CEO Ralph Boettger said on March 26. Yields on Sappi’s euro debt due in April 2018 climbed by 87 basis points from a record low on January 14, reaching 5.4% on Thursday.
Rates on similarly dated euro bonds of competitor Stora Enso advanced by 45 basis points to 4.3%. South African firms’ dollar-bond yields have added 10 basis points in the period, JPMorgan Chase indices show.
"Sappi is hoping to achieve a more competitive interest rate in the bond market," Mohamed Kharva, a Cape Town-based analyst at Nedbank Group, says.
The Johannesburg-based 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 issuance by companies.
Sappi has to repay R1bn of bonds on June 27. Yields on the debt have climbed to 6.32% since reaching a record low of 5.66% on July 19.
Rates on the South African rand bonds due on August 1 have gained 66 basis points, or 0.66 of a percentage point, to 5.02%.
The company is spending $540m 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 the continent’s biggest economy, excluding financial institutions, increased to $1.4bn in the first quarter from $1.06bn a year earlier, according to data compiled by Bloomberg.
"We can confirm that we are busy finalising the refinancing," Sappi head of corporate affairs Andre Oberholzer says. "We already use banks for other lines of finance. The bond market provides an additional avenue."
The wood-pulp conversion projects at the Ngodwana mill in Mpumalanga province and the Cloquet facility in Minnesota should be completed by the end of the third quarter, in June, raising Sappi’s output of the pulp by about 40% to more than 1.3-million tons a year, Mr Oberholzer says. "The overall dissolving wood-pulp market is growing at 6% a year while the viscose staple-fibre market grows at 8% a year."
The viscose variety, which is made from dissolving wood pulp, is used in sports clothing.
"Our global share of the overall dissolving wood-pulp market for 2012 was 14% and of the viscose staple-fibre market was 20%. These are set to increase once additional capacity comes online," Mr Oberholzer says.
Sappi, which returned to profitability in the year through to last September, said on February 6 that profit fell 62% in the first quarter because of lower paper and pulp prices.
The company derived 25% of its sales from southern Africa in the year to September.
The rand has depreciated 8.6% against the dollar this year, the worst performance among 16 major currencies tracked by Bloomberg after Japan’s yen, which has lost 9%.
The rand slipped 0.5% to R9.2725/$ in Johannesburg on Thursday morning.
Sappi’s stock dropped 7.1% 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.
South Africa’s Mondi was the best performer, rising 34%.
As consumers turn from magazines and newspapers to computers and cellphones to consume media, Sappi’s move away from paper makes sense, Mr Kharva says.
"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."