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I am Logan Miller, and I head up the European strategy team here at Credit Sites in London, and I'm pleased to be joined by my colleagues, Laurent Bernou and Felicity Jouf. So Laurent is our head of chemicals and packaging here in London, and Felicity is our lead analyst in the paper and packaging sector. So today we're going to be focused on tariffs, the recent de-escalation between the U.S. and its large trading partners, particularly China, and then we're going to walk through the fundamentals for both chems and paper and packaging, and then finally a list of picks and pans and a discussion around new issue trends within the two sectors.
So thank you both for joining me today. And I guess we'll kick it off with a discussion around tariffs. It's clearly been near and dear to the hearts of chemical and paper and packaging. Investors, given both of these sectors tend to be very globally oriented.
So I guess, Laurent, let's kind of start with you and kind of talk through what is the impact of tariffs on your sector, and then I guess if you can just kind of point out how is the chemical sector performed so far here today. Hey, hi, Logan. Yeah, it's a pleasure to talk to you today and to be here on this podcast. So as for chems, I have said most companies in our coverage across I've been hired have really limited direct exposure to tariffs.
It's because they have these local-for-local business profiles. It means that they mostly sell products that are manufactured locally. So the share of goods that are produced and sold in the U.S. in particular is usually of at least 75%.
Sometimes it's more than that, 85%, around 85% for BSF, or nearly 100% for some specific names like Axe Nobel or SICA. For most companies, except a few small high-yield issuers, I have to say, but most of them operate in at least two regions, Europe, of course, plus North America, at least, sometimes Asia as well. So that obviously helped to capture demand in all regions and if you have changed in trade flows, it obviously helps. But yeah, I mean, we do have concerns on tariffs, of course, because first, potential impacts on raw materials, they could be more expensive.
And the big question is obviously the negative impacts on the global economy. Chemicals is cyclical, so obviously very sensitive to economic cycles and demand. And we've already started to see in Q1, at the end of Q1, that companies are slightly more cautiousness from customers. So yeah, we see how it goes in the second quarter, but I don't really expect any major improvements.
Then obviously that has had a big impact on the high-yield side, actually, for chemicals. Chemicals was those of bond performance much more impacted in the high-yield side in April. It was the worst-performing sector with packaging, actually. And then on the IG space, because names are comparatively more defensive, the IG chemical grouping has actually tracked the index pretty much in the start of the year, so we've been more constructive on IG chems, yeah.
Great. I guess let's turn it over to packaging and paper. So Felicity, I guess, can you just kind of walk through the, I guess, what we've seen with tariffs and sort of the impact on the sector so far year-to-date? Yeah, sure.
Thanks, Logan. So yeah, overall for European paper and packaging, we expect tariffs to have a pretty severe impact. So similar to chemicals, we have had lots of companies kind of refocusing on the fact that their businesses are local-to-local in nature, which they expect to mitigate the direct impact, but we think the risk of second-order impact is very high for the sector. Pulp and paper markets are very cyclical, and earnings for P&P producers are very sensitive to any shifts in consumer and industrial sentiment.
So we definitely expect some level of demand disruption just overall as a result of the surrounding uncertainty in kind of volatility of markets. And on top of that, the companies in our coverage do have significant regional concentration and specifically very high concentration within Europe, which we think puts them in a worse position to adapt to kind of changing trade flows and means they're less able to capture demand where it does happen to pick up. And then finally, we think that the US tariffs on China risk redirecting cheaper goods away from the US and towards Europe, and those goods would have been packaged in China rather than Europe. So that kind of risks making European goods less competitive and reducing the domestic packaging demand within Europe.
But in terms of the reaction of packaging markets to tariffs, spreads held out relatively well during that first week of April in IG, and it was actually one of the best performing sectors behind real estate. So that kind of could be down to investors thinking that it's quite a defensive option, but it also could partly be down to the fact that it is quite a comparatively short-duration sector. And then, yeah, as Laura mentioned, high yield was a completely different story similar to chemicals and was one of the worst performing sectors, and that is partly going to be reflecting the presence of a number of much riskier single B and triple C rated credits, which sold off much more dramatically, we think, as investors have looked to move upwards in credit quality. So overall spreads are generally pretty much back to where they are, aside from for those riskier credits that have just stayed wider.
Yeah, it's been a pretty amazing rebound from the initial post-deliberation reaction in spreads. Obviously, we had both investing rate and high yield spreads in Europe really gapping out after just about a month after reaching kind of a new cycle tight. So we've really seen, with the escalation in the last month, a major snapback at spreads. But I'd be curious, I mean, we just wrapped up, you guys just wrapped up the first quarter results.
So let's dive a little into sort of the fundamental discussion. What have you been seeing from issuers, at least in terms of first quarter results, and then we can get into more in terms of the impact of the de-escalation? Yeah, I'll stop with, Kemp, because we've studied this year not expecting much positive catalysts, because at least last year we had a bit of restocking, but then demand remained richly soft in 2025, and obviously with some tariff uncertainties, that does not help market conditions. It has remained particularly tough for commodity chemist producers, so that's a bit of over-supply issues in petrochemicals, but also lack of pricing power.
Whereas on the specialty side, these producers are usually more resilient, depending on from higher and more stable margins, even in, I would say, lower cycles. But yeah, we said that for chemicals, chemicals with companies who struggle to beat 24 EBDA in 2025, we've already seen about three or four companies cutting EBITDA guidance after Q1. Slight gut, but yeah, definitely some downside risk to the 25 consensus estimates. And then in IG, we have, I would say, relatively solid balance sheets.
They are some outliers, like Axe Nobel, but otherwise, most companies, they've been working on cost savings and potential assets. Also, they have a bit of flexibility on that front, whereas in high yield, yeah, definitely another story because of higher rates for most companies, and their businesses are also more commoditized and cyclical, so yeah, investors have to be more selective there. I would say that we haven't yet seen any part of your winner or losers in terms of tariffs. K-plus-ness in the IG space is a name that has, I would say, yeah, it stands out because of stronger market conditions, which is fairly unusual in the space at the moment, and its key products, which is fertilizers, like potash-based, such as they've been exempt from tariffs.
Otherwise, yeah, we are more cautious with names that have weak rate profiles ahead of, you know, uncertainties with tariffs and potential recession, maybe. So that's many names in the highest space, like the Innocentities and Chem1, CABs, and Pomer. Then in the IG space, we are more cautious with names with, you know, high sort of to autos in particular because of weaknesses and high sort of to construction as well. So yeah, in general, what we do is that we monitor the macro indicators like PMIs and GED forecasts, and we've probably seen that slogan, but yeah, there's been a few cuts in GED forecasts for the US or Europe recently, for 25 and 26 as well, so yeah, not necessarily looking well for our against names, but also packaging, right?
Yeah, I mean, it's definitely not been a rosy start of the year for the broader I don't know, but I guess, Felicity, what about any things that you've been seeing from Q1 results in terms of the fundamental impact so far? Yeah, I mean, it's a pretty similar story in the market trends that we've seen in Kems. Paper packaging is in a pretty tough spot at the moment, as it's been through this kind of extended downturn, which really started with de-stocking in 2023. I mean, we've seen this macro recovery that's just been continuously pushed back.
So on the whole, we've kind of just seen gradual re-leveraging really across the board, and we now have quite a tough combination of, like, oversupplied markets, weak demand, and high costs. So we're kind of seeing some capacity closures and some production contailments that should help a bit, but then there's also some new capacity coming online that will kind of balance that out. So there is a gradual recovery happening. We are kind of seeing a positive trend in terms of volumes and prices, but that really is from a low base, and I don't think we're going to get a material recovery until that macro environment properly picks up, which seems unlikely any time soon.
So I think, yeah, amid the uncertainty, we kind of really just prefer companies that have a large scale and good geographical diversification, and do have more conservative balance sheets, because I think they're probably really going to be fine towards a lot of the challenges, companies like Smurfett, Westrock, and UPM. And then we also tend to prefer companies that are a bit further down the packaging value chain, where earnings tend to be more resilient if they've got more capacity to pass through cost quality to their customers. So on that grounds, we really like SLG CombiBlock, which produces cartons for food and beverage and markets. They kind of tend to be quite defensive.
And then on the other end of the value chain, where things are a bit more cyclical, that's where we're seeing some companies that really are looking a bit more vulnerable now. So in IG, we've got Stora, Enzo, and Metso Board, which are both low triple B rated, and they're both producers of Pulp and Virgin Paper Board, so they have quite cyclical earnings, and they're both very concentrated in Europe, so quite exposed to kind of European demand destruction. So we are seeing with them kind of a bit more concerns of potential foreign angel risks, and then for Metso Board in particular, they really stand out as potentially exposed to direct risks of tariffs, as 20% of their sales are exported from Europe to the US, so we expect them to kind of get a direct hit there. And then on the high yield side, also seeing significant re-leveraging, and that's going from a much higher base already, so kind of companies that we were a bit worried about going into last year now looking much more vulnerable.
So particularly, there's Pro Group, which is the most vulnerable. It's very concentrated in Europe, and it's got very limited diversification in terms of products. It makes recycled container board and corrugated board, which is very commoditized, and therefore can be very cyclical and easily substituted, and it's very exposed to kind of changes in raw material prices, which they can't really pass through to their customers, and we expect raw material prices to continue to be pretty volatile looking forward. So yeah, there are some companies that don't have much breathing room looking ahead.
All right, thanks, Felicity. So that sounds like you have a very kind of nuanced approach in terms of looking at various issue-level impact, but I guess focusing more on more recent developments between the de-escalation and the trade conflict, particularly in recent weeks between the US and China. So I guess, Laurent, how is this kind of shifting or changing the way you're looking at relative value within the chem space, and are there any picks and pans that you think your client should be focused on right now? Yes, actually, Logan, we just reviewed our recs in the European IG chemical space and upgraded our sector rec from underperform to marketperform.
That was just today. So valuation seems similar to the end of last year, with chems trading relatively tight at around 90 bps, still some 10 bps inside the European index. However, there are a few moving parts. One of them is Selenys, which was a US name, very volatile last year, and that's actually since being downgraded to high yield.
So now it's actually out of IG chems, and I would think that we actually improve the stability of the spreads going forward. There's also Linder that has widened compared to Air Liquide, and Linder is really one of the strongest names from a fundamental perspective. It's single A-rated. I think that, yeah, this spread that widens a bit overdone.
We also looked at the recent de-escalation of tariffs between the US and China, although it remained prudent because obviously tariff remained in place, some 10% on most countries, still 30% on China, etc. So yeah, still cautious, but yeah, more constructive on, I would say, overall fundamental and valuations altogether. We, I would say, in terms of individual recs, as I said, we upgraded Linder to market perform from underperform because of valuations. We also upgraded Sika to outperform, and it's because this name has a nice mix of defensive profile, even if it's highly exposed to construction, which is pretty much 85% of the business.
They have a good track record of really raising margins in the downturn, and they also have this short duration profile, which means that, yeah, we just find value compared to some other names like Air Liquide, the particular investors should pick the 27s in particular or the 30s. Then we have an underperform rec on Axe Nobel, touched on some M&A risk earlier, high leverage, and I also mentioned Air Liquide. We have an underperform rec because of valuation. We also have a few pans in the high space and three risky names, like for example, triple C rated Chem1, which is a PVC producer and obviously struggling in Europe because of, you know, the prolonged downturn in construction.
I think that investors should really stay away for another year from this name, and although two other names with Cap and Sim Thomer, high leverage, and as I said, it remains really uncertain in the market environment, so these are always three other pans in the space. Yeah, so if I'm looking at where the paper packaging names that we cover are trading, it's tough because in IG there has been a spread value, everything's trading back to where it was really, and it is looking fairly tight overall, so I think we definitely do have more pans and picks in the IG space. So at the moment we've got SIG CombiBlock, which is our favorite in the IG space, based on its kind of defensive business model, and it has a new broad bond that has a pretty decent spread pickup versus its peers. Then our main pan is Stora Enzo, and that's, as I mentioned, due to its kind of technical business and quite high leverage, in which it does trade fairly tight.
And then we do like UPM on a fundamental basis, but we just think it trades too tight, so we'll stay clear of that one. And then in high yield, our main pan at the moment is Pro Group, where the outlook is very challenging and the liquidity is very tight. They're reporting their Q1 results next week, so we'll see how that goes. And then we've had a sell recommendation on Fedrigoni, which is a single B luxury packaging producer since November, basically due to its very aggressive financial policy, which has led to weak free cash regeneration and very high leverage.
So it's sold off very dramatically since liberation day, which is kind of fitted our view. We want to stay clear of those weaker credit profiles, given the kind of challenging environment, and then it's going to work out at what point you're willing to take exposure to any risk of your names, if you think you are eventually being compensated for it. Yeah, I think that's a theme that I think all of us are focused on right now, is where is the best risk-reward, especially for sectors that are likely to continue to feel the impact of tariffs over a longer period of time. But for now, it looks like the new issue markets are open.
We've had pretty much a stalemate in early April, and then the primary markets started to reopen. Particularly in IG, we've seen a pretty sizable wave of new issue supply, generally speaking, over the last month or so. High yield's been starting to pick back up, but it's still down on a year-by-year basis. But I guess in terms of what are some of the things that you're seeing in terms of issuance across chems, across paper, and packaging that may differentiate from the rest of the market?
Or how are you sort of thinking about the potential for more supply coming on, too, as well? Well, so we've started to be actually very busy with new issuance across chems and packaging, just like since last week, actually. Most of the days actually fortifies. Yeah, so we definitely started to be busy on the issuance side since last week.
Across chems and packaging, most of the days actually fortify. We're still looking for potential deals driven by M&A, but I think that we'd probably take more time due to market uncertainties. I'll touch on it after that. Maybe I'll start the revise.
So at the start of the year, we're expecting already, yeah, sizable issuance, probably 10 billion in IG chems and about 3 billion in higher chems. And yeah, so far we've seen almost, yeah, about 3 billion in IG chems with Axiom, Bell, Linda. Science Co is in the market for the first time since their spin-out from Solveig at the end of 23. First time in the euro market and last year they were in the US dollar market for the first time.
So yeah, it's interesting. And then, yeah, we've seen Ineos at the start of the year with 400 million euros and there's certainly 400 million more by year-end that we're expecting. And Pauline will come with, I think, a sizable deal of probably 1.3 billion across year-end dollars at the end of the year. But yeah, I'll finish with M&A.
I think that's definitely the potential for some big deals with ESF about to sell a coatings business, which is a global business across regions and a top line of 4 billion euros. So you could appreciate that. Yeah, I could drive some nice issuance here. And Science Co also maybe touched on it, but they're about to sell some known core assets at some point.
Businesses that generate around 700 million euros of sales. And I could also be, along with some disposal in high yield, some private equity owners that want to sell potentially Italmatch or Cab. So yeah, maybe we'll see our first LBO deals in a while. That would certainly be exciting.
It's been a pretty slow backdrop for LBO and MA activity over the last, really, since the ECB started hacking rates back in 2022. It's been rather quiet for the market in general. But I guess, Felicity, let's wrap up with you. What are you seeing in terms of issuance and what are your expectations going forward?
Yeah, so as Laura mentioned, new issuance was really kind of picked up in the last couple of weeks, particularly in paper and packaging. So we had all three weeks ago US reverse Yankee issuer, and then in Euro IG, SIG CombiBlock came to the market a few weeks ago. And then this week, we've had Mesa Board, which is also kind of predominantly just refinancing. And then in high yields, we also have Trivium packaging in the market this week, which should be an interesting one to watch as it's single B and kind of embroiled within the RDA complex.
And then in terms of overall issuance expectations, we expected around 3 billion euros of IG issuance this year based on refinancing. And then in the high yield space, we've got this 4 billion euro high yield maturity wall in 2026 that people are starting to look at this year, particularly in the kind of riskier credit space. We've got RDA and Penta Plus, both with their negotiations ongoing. And then overall, there's been this kind of broader trend in paper and packaging of quite large-scale market consolidation that was very busy last year.
So we might potentially see any more issuance to fund that if the trend does continue going on this year. That's really interesting. Super helpful. Well, I think that wraps up our podcast today.
Laura and Felicity, thank you so much for your time. And for those who are listening who want to ask follow-up questions to either of our analysts, please use the Credit Sites website, ask the analyst function, and we'd be happy to respond to your questions. Otherwise, thank you. We'll see you on the next episode.
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