OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Issuer Default Ratings on India-based paper maker Ballarpur Industries Limited (BILT) and its subsidiary Bilt Paper B.V. at 'B+'. The Outlook is Stable.

The affirmation follows Fitch's expectation of significant improvement in BILT's financial profile, with proceeds from the sale of Malaysia-based Sabah Forest Industries Bhd (SFI) to be used for debt reduction. Fitch expects BILT's net leverage (net adjusted debt/operating EBITDAR) to fall below 5.5x by end-March 2016 from 7.83x a year earlier.

Failure to complete the SFI sale or significant use of the SFI sale proceeds for anything other than debt reduction, which would cause BILT's net leverage to remain above 5.5x, may result in negative rating action.

KEY RATING DRIVERS

Sale of Malaysian Operations: BILT has entered into an agreement to sell its entire 98.08% equity stake in SFI for an enterprise value of USD500m. We expect the company to use most of the proceeds to repay debt at SFI and other group entities. Fitch expects the total adjusted debt of BILT to reduce to around INR46bn after the sale, from INR62.3bn (Fitch has applied 50% equity credit to the perpetual debt) at the end of the year to 31 March 2015 (FY15).

Financial Profile to Improve: Fitch expects BILT's net leverage to fall to around 5.5x by FY16 (FY15: 7.83x). BILT's profitability is also likely to improve from FY17 with the sale of the weaker SFI operations and likely resumption of operations at its Kamalapuram (KPM) pulp unit. Fitch consequently expects leverage to reduce further, supported by lower debt levels, improvement in its profitability and absence of any large capex plans.

Government Support for KPM Unit: BILT is likely to restart its KPM unit, which produces rayon-grade pulp, during 4QFY16-1QFY17. Fitch expects incentives from the state governments to help BILT reduce operational losses at this unit, which BILT shut in May 2014 following weak rayon-grade pulp prices globally. The receipt of state government subsidies for power and pulp wood for seven years, should KPM unit be restarted, should see KPM report positive EBITDA during FY17 compared to the EBITDA losses currently.

Strong Market Position: BILT has a strong market position in the Indian writing and printing paper markets, with market share of about 42% in the Indian coated paper segment and about 25% in uncoated paper (hi-bright) segment by sales. BILT's market position is supported by its strong brand presence and large distribution network in the fragmented paper market.

Highly Integrated Operations: BILT meets its hardwood pulp requirements internally and has captive power plants at all except one of its units. The SFI sale is likely to reduce BILT's supply of hardwood pulp to meet only around 75% of its needs. However Fitch does not expect this to have significant impact on BILT's profitability given its ability to source hardwood pulp externally and the prevailing low pulp prices.

Cyclical Business: The company is exposed to the volatility in paper prices, which impacts its profitability. Global paper prices have remained weak over the last three years reflecting the lower demand globally.

Strong Linkage with Subsidiary: Bilt Paper B.V's ratings reflect its strong operational and strategic linkages with the ultimate parent, BILT. Bilt Paper is in the same line of business as BILT and the two have a common treasury and management team. Bilt Paper holds a 99.99% stake in Ballarpur Graphic Paper Products Ltd. (BGPPL), the key Indian operating entity, and a 98.08% stake in SFI. Bilt Paper B.V. accounts for over 90% of BILT's overall revenue and over 80% of its EBITDA.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Completion of the sale of BILT's 98.08% shareholding in Sabah Forest Industries Bhd during FY16
- Significant reduction of debt using the proceeds of SFI sale
- Absence of any major capex over the medium term
- Positive EBITDA from the KPM unit from FY17 after operations restart with government subsidies
- Improvement in BILT's overall EBITDA margins to over 18% from FY17

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Failure by BILT to reduce its net leverage comfortably below 5.5x by FY16.
- EBITDA fixed charge cover sustained at below 2x (FY15:1.5x)
- Any weakening in liquidity

Positive: A rating upgrade is unlikely in the medium term. However, future developments that may, individually or collectively, lead to positive rating action on include
- Significant improvement in BILT's profitability resulting in EBITDA margin sustained at over 20% (FY15: 15.7%)
- Substantial reduction in debt levels resulting in BILT's net leverage falling below 4x on a sustained basis.