Investing.com -- S&P Global Ratings has revised its outlook for U.K. and South Africa-listed paper and packaging producer Mondi (LON: MNDI ) PLC from stable to negative. This decision is based on the expected deterioration of credit metrics in 2025. Despite this, S&P has affirmed its ’A-’ long-term issuer credit rating on Mondi and its rated subsidiaries, as well as its ’A-’ issue rating on the unsecured bonds.

Mondi PLC has been experiencing weak EBITDA over the past two years, in line with most industry players. The S&P Global Ratings-adjusted EBITDA was €975 million in 2024, down from €1.06 billion in 2023 and €1.7 billion in 2022. This decline is attributed to lower prices, higher restructuring and operating costs, and foreign currency losses.

Cash generation at Mondi has been undermined by lower EBITDA, expansionary investments, and significant dividend payouts, leading to weaker-than-expected credit metrics. Assuming no significant changes in market conditions, S&P expects further weakening of these metrics in 2025 due to the partially debt-funded acquisition of Schumacher, ongoing high capital expenditure (capex) and dividend payments.

Specifically, S&P forecasts net debt to EBITDA at 2.2x for 2025, compared with 1.9x in December 2024 and 0.5x in 2023. Additionally, funds from operations (FFO) to debt is predicted to be at 36% in 2025, down from about 43% in 2024 and 150% in 2023.

The negative outlook reflects the expectation that credit metrics will continue to deteriorate in 2025 due to depressed market conditions, high capex, acquisitions, and substantial dividend payments. As of December 2024, the weighted-average S&P Global Ratings-adjusted debt to EBITDA was about 2.0x, and the weighted-average adjusted FFO to debt was about 49%.

The company’s high expansionary investments and dividend payments are expected to continue to constrain discretionary cash flow (DCF). Over the period from 2023 to 2025, the group is projected to spend €300 million-€400 million per year on growth and sustainability projects, mostly related to its corrugated and flexible packaging operations.

In 2024, despite the negative free operating cash flow (FOCF), the group paid ordinary dividends of over €312 million. S&P anticipates that weak demand, Mondi’s investment and dividend policy, and the acquisition of Schumacher will continue to constrain cash generation in 2025. The forecast for 2025 is a negative S&P Global Ratings-adjusted DCF of €50 million-€75 million.

S&P could lower the rating on Mondi if credit metrics continue to deteriorate, leading to FFO to debt remaining below 45% or debt to EBITDA exceeding 2.0x. Alternatively, the outlook could be revised to stable if credit metrics improved due to reduced expansionary capex or shareholder distributions or improved market conditions.

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