Smurfit Kappa sold €750 million of bonds on Monday to refinance debt that matures within the next two years at cheaper rates.
The company is seeking to get ahead of an expected rush by European firms to the debt markets in the coming weeks to take advantage of record low borrowing costs.
While the Dublin-headquartered cardboard box maker initially set out to raise €500 million to carry an interest rate of about 1.625 per cent, it ended up selling €750 million of notes at a rate of 1.5 per cent, according to market sources. Demand for the bonds topped €3.9 billion.
A third of the funds will be used to redeem the company’s €250 million of senior unsecured bonds that fall due in October 2020 and currently have a coupon of 3.136 per cent. The remainder will be used to repurchase €500 million of bonds due in June 2021 that carry a fixed 3.25 per cent rate.
The new bonds will cost Smurfit Kappa about €11.25 million in interest, some €12.8 million less than the notes that are being refinanced. The company is seeking to get ahead of an expected slew of companies and governments in September to take advantage of ultra-low bond market rates as investors expect the European Central Bank to ease monetary policy in the middle of the month.
The bonds being refinanced equate to about 20.6 per cent of Smurfit Kappa’s gross debt at the end of June.
S&P analysis
"Our view of Smurfit Kappa's business risk profile remains unchanged and continues to reflect the group's leadership in the corrugated container markets, especially in Europe and Latin America, " said debt ratings firm Standard & Poor's (S&P).
“The group is highly vertically integrated since it produces most of its paper in its own mills, with 75 per cent of its containerboard based on recycled fibre. This allows Smurfit Kappa to exhibit better profit margins than its peers because it reduces its exposure to volatile containerboard prices.”
However, S&P said that Smurfit Kappa’s €1.6 billion, four-year investment programme announced early last year will “weigh on cash flow generation and most likely limit any significant improvement in credit metrics in the near term”.
The FTSE 100-listed company’s net debt stood at 2.2 times earnings at the end of June, up from a ratio of 2.1 a year earlier.
