DBRS Confirms UPM-Kymmene Oyj at BBBp

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating for UPM-Kymmene Oyj (“UPM” or the “Company”) at BBBp. The trend is Stable. The confirmation primarily reflects the stability in UPM’s credit profile.

UPM’s profitability has improved but remains generally low on a historical basis. European newsprint prices and European/North American magazine paper prices increased in 2005 and gradual increases in paper demand and prices are expected over the near term, based on the current supply/demand balance. Finland’s paper industry strike will significantly reduce earnings in Q2 2005. However, projects such as paper machine/sawmill upgrades and power plant/pulp mill investments will lower costs, increase capacity, and positively impact earnings in the 2005-2007 time period. In addition, a new paper machine in China will start up in H2 2005 with the full benefit to earnings occurring in 2006.

DBRS sees that UPM should be able to overcome the negative effects of the strike and gradually strengthen its balance sheet, barring a major acquisition or worsening economic conditions. The Company has reduced total debt over the past three years, but debt levels remain in excess of 40% and are considered high for a cyclical company. Despite the lacklustre short-term outlook, the following five positive factors provide UPM with the ability to substantially increase cash flow and reduce debt in the next cyclical upturn:
(1) UPM has low-cost paper assets and high earnings leverage to magazine/fine papers and newsprint, providing the Company with strong earnings potential when advertising markets strengthen;
(2) Further cost savings are planned in 2005, following savings of €200 million in 2004;
(3) Capex is expected to remain well below depreciation, which benefits cash flow;
(4) UPM has a manageable debt repayment schedule, which is well within its internal cash generation capability, and strong liquidity; and
(5) UPM has additional financial flexibility in the form of its electrical power generation assets, equity investments, and approximately 2.7 million acres of timberland. In addition to providing incremental cash income, these investments represent assets that can be monetized.

Note:
p – This rating is based on public information.