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Norske Skog Credit Report Analyst: Glenn Kringhaug +47 22 01 61 62

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Norske Skog Credit Report Analyst: Glenn Kringhaug +47 22 01 61 62 Credit Research Norske Skog Credit report Analyst: Glenn Kringhaug +47 22 01 61 62 27 November 2019 25 November 2019 This document is for the use of the recipient only and should not be copied or distributed to any other person or entity. Please refer to important disclosures at the end of this presentation. Key Terms Issuer Norske Skog AS Material group companies Norske Skog (Australasia) Pty Ltd, Norske Skog Bruck GmbH, Norske Skog Skogn AS, Norske Skog Saugbrugs AS, Norske Skog Golbey SAS, Guarantors Norske Skog Industries Australia Ltd., Norske Skog Tasman Ltd., Norske Skog Paper Mills (Australia) Ltd., Norske Skog Paper Mills (Albury) Pty Ltd., and Nornews A/S Issue amount EUR 125m Tenor 3 years, maturity 14 June 2022 Amortization 100% repayment at final maturity (bullet) Coupon rate 3 months EURIBOR + 6.00% p.a. (floor at zero), quarterly interest payments Status Senior secured (subject to the super-senior status of the RCF, guarantee facility and permitted hedging sharing security with the bonds) (i) Share pledges over the Guarantors, (ii) fixed and floating charge security over (a) Saugbrugs mill, (b) the Skogn mill, the (c) the Tasman mill, the (d) Albury mill and (e) the Security Boyer mill, (iii) assignment of shareholder loans and assignment of intercompany loans Call options Make-whole first 18 months, callable thereafter (all or nothing) at par plus 50%/30%/10% of the initial Coupon after 18/24/30 months, respectively Equity claw-back Up to 35% of issue amount may be repaid at first call price by primary proceeds raised through an IPO Special covenants Special covenants include restrictions on shareholder distributions, negative pledge, financial support, financial indebtedness, subsidiaries distributions Maintenance • NIBD/EBITDA shall not exceed 2.75x covenants • Liquidity (free cash) shall exceed NOK 100,000,000 Incurrence tests With respect to dividend payments, NIBD / EBITDA shall not exceed 2.00x Dividend restrictions Up to 75% of last years adjusted net profit, subject to the incurrence test being met (i) RCF of maximum EUR 31m (annual clean down provisions), (ii) permitted hedging, (iii) guarantee facility, (iv) factoring facility of maximum EUR 40m, (v) financial leasing of maximum EUR 12m, (vi) leasing in the ordinary course of business that would have been classified as an operational lease prior to the implementation of IFRS 16, (vii) Saugbrug Permitted additional project facility (NOK 94m), (viii) Golbey loans of maximum EUR 8m, (ix) Bruck boiler facility of maximum EUR 58m (which is subject to the incurrence test being met at debt commitment), (x) any credit facility provided by any governmental institution of maximum EUR 10m, (xi) intra-company loans, (xii) subordinated shareholder loans, (xiii) debt in acquired entities if refinanced within 3 months and (xiv) a general basket of EUR 5m Permitted disposal The group may freely sell or dispose (i) the Albury mill, (ii) the forest estates in Tasmania, (iii) the Bruck hydro plant, (iv) the Saugbrugs development properties Change of control Bondholder’s put option at 101% of par value Documentation / Norwegian law documentation (relevant jurisdictions for security documents) / Nordic Trustee Trustee Source: ABG Sundal Collier 2 Credit summary Weak market exposure but tight covenants and solid credit metrics Credit strengths Credit concerns . Low leverage and solid debt service ability: On our estimates, Norske Skog will . Top of a highly cyclical industry: The paper market is highly cyclical with have NIBD/EBITDA of 0.4x YE 2019. We estimate that debt service ratio will stay at relatively volatile price movements and prices currently point down from what seem ~8-9x through the tenor. to be the top of the cycle. However, this is also true for costs. Large liquidity buffer: Norske Skog had a cash position of NOK 909m at the end . High sensitivity: Norske Skog’s earnings are relatively sensitive to price changes, of Q3’19. currencies, etc., and 10% lower prices would shave off roughly all EBITDA, but lower costs would compensate. By comparison, EBITDA fell “only” ~50% after the . Tight bond structure: We argue that the covenants are strict from the financial crisis, when prices were down ~10-20%. We also note that Norske Skog bondholders’ perspective. The financial covenants include a maximum uses long contracts and plans to hedge, which reduce the sensitivities short-term. NIBD/EBITDA of 2.75x (maintenance) and 2.0x for dividends. The bond will also benefit from a comprehensive security package based on a full 1st lien fixed and . Publication paper market is in structural decline: Magazine and newsprint paper floating charge security interest in five of the group’s seven mills. have increasingly been substituted by digital solutions. The newsprint and magazine markets have declined by roughly 5% on average per year for several . Long track record: Norske Skog has a relatively long track record, and we note years. With no end in sight for digitalization, we expect the trend to continue. that adjusted EBITDA in the period we have data for (back to 1995) has never been below NOK 671m. Capacity shutdowns “stopped” when prices moved up: Paper prices have been strong recently, partly due to many capacity shutdowns following price decreases, . Strong diversification across client base and geographies: Norske Skog has but we have seen few shutdowns in the last couple of years. The lack of shutdowns ~450 different customers spread across the world, with its largest clients accounting is likely leading to decreasing prices. for less than 10% of revenues. Asset concentration: ~50% of 2018 EBITDA was from the Golbey plant. Golbey . Good asset quality: All of Norske Skog’s paper mills were profitable in 2018 and has an excellent position on the cost curve, but we note that all of Norske Skog’s have been so in recent years. Our analysis also show that it is well positioned at the mills have had positive EBITDA in the past few years. global cash cost curve due to the strong USD. Cash leakage: The dividend restrictions are set to 75% of last year’s adjusted net . Low LTV at conservative EV/EBITDA: Even with a very conservative valuation profit (subject to incurrence test), which implies that roughly all cash flow throughout perspective, we find decent value coverage. Assuming an EV/EBITDA of 4x implies our forecast period goes to equity holders. a net LTV of 16% (on NOK 1bn in EBITDA). By comparison, peers are trading at ~9x EV/EBITDA currently and ~7x historically (but Norske Skog arguably warrants a . Leverage does not improve at the time of refinancing: Due to the relatively discount). aggressive dividends and structural decline of the market, we do not estimate any deleveraging through the tenor. Strong market position: Norske Skog is one of the leading global suppliers of newsprint and magazine paper, with ~8% global market share in newsprint, ~5% in SC magazine paper and ~3% in LWC magazine paper (source: RISI). Source: ABG Sundal Collier 3 Norske Skog at a glance Location of mills and share of capacity ~2/3 of revenue from Newsprint Skogn, NO 19% 17% 18% Saugbrugs, NO Bruck, AT 15% Newsprint SC 6% Tasman, NZ 18% 22% Golbey, FR LWC 10% Albury, AU 65% 11% Boyer, AU Source: ABG Sundal Collier for graphics, Norske Skog for data Source: ABG Sundal Collier for graphics, Norske Skog for data Production capacity at the seven mills Golbey and Albury are the most profitable '000 tonnes NOKm EBITDA margin 600 350 324 20% 300 500 16% 250 15% 13% 400 172 12% 200 148 125 300 150 107 107 9% 565 7% 8% 510 265 100 6% 6% 6% 73 460 135 4% 200 50 265 100 0 0% 125 150 150 0 Skogn Saugbrugs Bruck Golbey Albury Boyer Tasman Newsprint LWC SC EBITDA Margin Source: ABG Sundal Collier for graphics, Norske Skog for data Source: ABG Sundal Collier for graphics, Norske Skog for data 4 Strong global presence 3rd biggest producer of publication paper 2nd biggest producer of newsprint Rank Company Tonnes (000) Mkt. Share Rank Company Tonnes (000) Mkt. Share 1 UPM 6,109 13.5% 1 Resolute 1,829 8.4% 2 Stora Enso 3,170 7.0% 2 Norske Skog 1,759 8.1% 3 Norske Skog 2,625 5.8% 3 UPM 1,585 7.3% 4 Resolute 2,282 5.1% 4 Stora Enso 1,280 5.9% 5 Nippon Paper 1,817 4.0% 5 Nippon Paper 1,240 5.7% 6 Oji Paper 1,759 3.9% 6 Oji Paper 1,174 5.4% 7 SAPPI 1,350 3.0% 7 Palm 980 4.5% 8 Holmen 1,150 2.5% 8 Kondopoga 695 3.2% Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Source: ABG Sundal Collier for graphics, Fastmarkets RISI for data Newsprint market share in Australasia Magazine paper market share in Australasia ~30% Norske Skog Norske Skog #1 Other #1 Other ~80% Source: ABG Sundal Collier for graphics, Norske Skog for data Source: ABG Sundal Collier for graphics, Norske Skog for data 5 Diversified customer base in Europe, long contracts in Australasia Solid customer base Customer share of sales, Europe, LTM Q1’19 Customer share of sales, Australasia, LTM Q1’19 Highly concentrated with >30% of sales attributed to two key customers secured on Top 15 customers long-term contracts to represent ~30% of sales 2022/2024 . ~450 established customers. Fairfax Media and NewsCorp Australia are key customers. Mainly sold on 3-12 month fixed price contracts with some . Long-term relations with domestic newsprint printers, current opening for price re-negotiations. Contracts specify both fixed contracts in place to 2022/2024. Contracts specifying price and volumes and volumes as a percentage of customers’ total share of required paper volume to be provided by Norske required volume.
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