OREANDA-NEWS. Fitch Ratings has affirmed Sappi Southern Africa Limited's (Sappi SA) National Long-term rating and senior unsecured issue rating at 'A-(zaf)'. The Outlook is Stable. Fitch has affirmed the Short-term rating at 'F1(zaf)'.

Fitch has simultaneously withdrawn the ratings as Sappi SA has chosen to stop participating in the rating process due to the change in Fitch's regulatory status in South Africa. Therefore, Fitch will no longer have sufficient information to maintain the rating and accordingly, will no longer provide ratings or analytical coverage for Sappi SA.

The affirmation reflects the strong trading performance of the Southern African business delivering good revenue growth together with increased profitability margins, while the group has also applied its free cash flow generation to deleveraging the business.

KEY RATING DRIVERS
Weaker Parent
Fitch views Sappi Limited's (Sappi SA's parent) credit quality as weaker than Sappi SA, as the group as a whole remains significantly exposed to the structurally declining paper markets in Europe and North America, which impacts margin and cash flow generation. The weaker financial profile and the absence of any legal obligation to prevent cash flow from Sappi SA to Sappi Ltd means we believe there is a risk of cash drain from Sappi SA to support the international parent and help service debt at a group level.

Continued Deleveraging
Sappi SA successfully reduced its leverage in the financial year 30 September 2015 (FY15). Given our expectation of strong free cash flow over the forecast period, we forecast further deleveraging absent any upstreaming of cash or significant acquisitions. Sappi SA's ZAR750m bond matured in April 2015 and this was repaid using existing cash resources resulting in a decrease in reported debt of ZAR2.4bn (FY14: ZAR3.1bn). Together with the greater levels of profitability and funds flow from operations (FFO), this resulted in improved credit metrics with FFO lease adjusted leverage improving to 1.0x (FY14:1.2x).

Solid Growth With Increased Margins
The prior years' reorganisation of the business resulted in almost 7% growth in sales for FY15 and increased profit margins. Sappi SA benefited from rand depreciation against the US dollar, given its largely rand-based cost structure and USD-linked sales pricing (notably for dissolving wood pulp; DWP). We expect that Sappi SA's leadership position in DWP production together with its refocused paper and packaging business will allow the business to continue to deliver growth (low single digit growth expectations) at flat or slightly lower margins for the forecast period.

RATING SENSITIVITIES
Not applicable as the ratings have been withdrawn.