Fitch Affirms Smurfit-Stone; Revises Rating Outlook to Negative.

CHICAGO -- Fitch has changed Smurfit-Stone Container Corporation's (SSCC) Rating Outlook to Negative and has affirmed the company's senior unsecured and issuer default ratings (IDR) as follows:

-- Issuer default rating at 'B+';

-- Senior unsecured at 'B+/RR4';

-- Senior secured bank debt at 'BB+/RR1';

-- Preferred stock at 'B-/RR6'.

SSCC's leverage to earnings (debt/EBITDA) is high, but last year-end's ratio of 7.7 times (x) is an anomaly. Third and fourth quarter results were afflicted with abnormally high fiber and energy costs. Nevertheless, SSCC's financial profile is weak, particularly when facing the costs of an aggressive restructuring of the company.

Having shut almost 500,000 tons of machine capacity at three different locations, SSCC will next eliminate costs in its converting system. SSCC plans to close up to 20% of its downstream box plants and six corrugators while increasing cost-efficient throughput in other larger facilities. This, together with centralized purchasing, is targeted to cut nearly $600 million out of SSCC's cost structure by the end of 2008. SCC will also refocus its converting plants on grades best suited to its machines, abandoning geographic markets in favor of a product focus. The company is also planning to move commodity manufacturing into higher-end custom packaging in more lucrative markets. This shift, without disenfranchising its existing customer base, is intended to raise top line revenues by $650 million by the same 2008 target date.

SSCC's restructuring is estimated to cost $400 million in annual capital and a total of $130 million in cash restructuring costs. The intended sale of SSCC's Consumer Packaging business is necessary to finance the cost and a lynchpin to the soundness of the plan.

In our view alternatives are few. SSCC's competitive landscape is also moving to improve profitability by eliminating costs, and capacity reduction is a necessary response to global changes in manufacturing venues, growth in niche market segments and weakness in others, and changing product preferences. SSCC should likely realize cost savings by running higher volumes through fewer, faster machines and dropping low volume SKUs. Plans to further penetrate higher growth pharmaceutical and food packaging markets are less assured and elevate competitive risk. If the company's plans are working, operating margins should begin to show signs of improvement, even without price increases in boxes and linerboard, and will be the yardstick for success of the company's plans and the precursor of further rating actions.

SSCC is a North American leader in the production of corrugated boxes, a leading producer of folding cartons, and the world's largest recycler of paper products. SSCC produces over 7 million tons of linerboard and ships over 85 billion square feet of boxes annually. Sales in 2005 were in excess of $8 billion.

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