Rating Downgrade Overview
Moody’s Ratings downgraded Mercer International Inc.’s corporate family rating to Caa3 from Caa1 on Thursday, citing the likelihood of a distressed exchange or balance‑sheet restructuring. The agency also lowered the probability‑of‑default rating to Caa3‑PD from Caa1‑PD and reduced senior unsecured debt ratings to Ca from Caa2, while the Speculative Grade Liquidity Rating remains at SGL‑4 with a stable outlook.
Drivers of the Downgrade
The downgrade reflects expectations of persistently high leverage, low interest‑coverage ratios and free‑cash‑flow deficits as increased fiber costs, weak pulp pricing and lower demand are projected to continue at least through 2027. Moody’s also highlighted a limited liquidity runway because Mercer’s two revolving credit facilities are set to expire in January and September 2027.
Liquidity Position
Mercer’s liquidity sources total approximately $210 million versus projected uses of about $294 million through December 2027. As of March 2026, the company holds roughly $85 million in cash and short‑term investments and has about $125 million of availability under its German revolving credit facility. Expected uses comprise roughly $200 million of free‑cash‑flow consumption through December 2027 and repayment of $94 million drawn on the company’s $113 million Canadian revolving credit facility.
Covenant Pressure
The German credit facility currently operates under a waiver on financial covenants that expires at the end of the fourth quarter of 2026. Moody’s expects Mercer to breach this covenant if the waiver is not extended beyond that date, given rising borrowings and a decline in German EBITDA.
Senior Unsecured Notes
The Ca ratings assigned to senior unsecured notes reflect their structural subordination to the Canadian revolving credit facility and other indebtedness of operating subsidiaries. The notes do not benefit from guarantees of operating subsidiaries.