Ratings agency Standard & Poor's (S&P) is to leave its Smurfit rating on credit watch with negative implications following the overwhelming approval of the Madison Dearborn takeover by shareholders.

Smurfit's BBB+ rating was first placed on credit watch by S&P on May 13th, following preliminary discussions on taking the company private.

The decision to maintain that status reflects the change that the Madison Dearborn takeover is likely to bring to Smurfit's financial position. The private-equity firm has said it intends to operate the company on a highly leveraged basis.

"Although full details of the acquisition are not yet known, Smurfit's financial profile after the transaction will be significantly weaker than at present," said S&P credit analyst Mr Andreas Kindahl.

"Madison Dearborn has indicated that it is initially targeting a net debt-to-EBITDA [earning before interest, tax, depreciation and amortisation\] ration of about 4.5 times, which will result in the Smurfit ratings being lowered by several notches to non-investment grade."

Smurfit, as it stands, has an investment-grade balance sheet.

Mr Lars Kjellberg, analyst with Credit Suisse First Boston, said yesterday that the ratings move was "to be expected" in light of the gearing strategy to be followed by Madison Dearborn. Such high debt levels could normally be expected to attract junk status, he said.

S&P has said it will review the credit-watch status as soon as it obtains further information on the financing of the acquisition and the company's future business and financial strategies.

Shares in Smurfit closed at €3.01 in Dublin yesterday, up one cent on the day and remaining at a level close to the theoretical value of the Madison Dearborn offer of €3.04½.

Smurfit said on Wednesday that 83.2 per cent of shareholders had approved Madison Dearborn's $3.7 billion (€3.8 billion) bid.

An 80 per cent acceptance rate was required for the offer to become unconditional. The offer remains open for acceptances until August 20th, with overall agreement still subject to regulatory approval.

As the first stage in this process, Smurfit has applied to the High Court for sanction on the spin-off of its 29 per cent holding in US company Smurfit Stone Container Corp (SSCC).

Smurfit shareholders are due to receive one share in SSCC for every 16 they currently hold in the Smurfit group, as well as a cash consideration in respect of those shares.

These payments are not expected to be made before September.