Fitch Ratings has lowered Mercer International Inc.'s Long-Term Issuer Default Rating to 'B-' from 'B+' and set the company's outlook to Negative, citing persistent softness in both pulp and lumber markets that is constraining earnings and extending leverage pressures.
The rating agency projects that Mercer’s EBITDA leverage will remain above 5.5x for most of the forecast horizon, a level that surpasses Fitch’s prior negative rating sensitivity threshold of 4.5x. According to the agency, weak demand and depressed prices for pulp - particularly from China - are materially reducing the company's EBITDA generation.
Fitch expects the pulp market to stay under pressure through 2026, with a recovery beginning in 2027. Under that scenario, the agency forecasts Mercer’s leverage will rise above 6.0x in 2027, limiting prospects for near-term deleveraging.
Although Mercer reported what Fitch describes as adequate liquidity of roughly $376 million as of September 30, 2025, the rating firm projects that persistent negative free cash flow will gradually erode this cushion. Fitch observes that Mercer is likely to require alternative liquidity sources beyond operating cash flow to sustain its current buffer over time.
Fitch also highlights continued underperformance in the lumber segment, which has struggled to reach EBITDA breakeven following price declines after the pandemic. The agency expects only gradual improvement in lumber through the forecast period and notes that weak consumer demand will likely delay any meaningful recovery in the U.S. housing market.
In reaction to the challenging market environment, Mercer has suspended dividends since the second quarter and curtailed capital expenditures to maintenance levels. Fitch notes management is not expected to pursue share repurchases and that the company's internal leverage target remains below current leverage levels.
Fitch points to some structural advantages in Mercer’s pulp business, which accounts for approximately 75% of EBITDA. The agency says Mercer benefits from a relatively favorable global cost position - placed in the middle of the second quartile - owing to modern mills, proximity to raw material sources and advantageous fiber procurement arrangements.
Looking ahead, Fitch indicates the rating could be downgraded further if mid-cycle EBITDA leverage consistently exceeds 6.5x, interest coverage falls below 1.5x, liquidity deteriorates, or the company fails to address upcoming maturities in a timely manner. Conversely, an upgrade would require a sustained reduction in leverage to below 5.5x, continued improvement in EBITDA margins and a material decline in gross debt.
Clear summary
Fitch downgraded Mercer International to B- from B+ with a Negative outlook, citing prolonged weak pulp and lumber markets that drive higher leverage and deplete liquidity. The agency forecasts continued pressure on pulp through 2026 with recovery in 2027, expects leverage to exceed 6.0x in 2027, and warns Mercer may need liquidity sources beyond operations as free cash flow remains negative.
Key points
- Fitch lowered Mercer’s long-term IDR to B- from B+ and set a Negative outlook due to weak pulp and lumber markets.
- Fitch expects EBITDA leverage to stay above 5.5x through most of the forecast period and to exceed 6.0x in 2027 as pulp markets recover only beginning in 2027.
- Mercer reported about $376 million in liquidity as of September 30, 2025, but Fitch projects this buffer will be eroded by persistent negative free cash flow, likely necessitating additional liquidity sources.
Risks and uncertainties
- Further downgrade risk if mid-cycle EBITDA leverage persistently surpasses 6.5x, which would further strain the company's credit profile - sector impact: pulp and paper, corporate credit markets.
- Interest coverage falling below 1.5x or worsening liquidity could trigger additional rating action, affecting lender and bondholder exposure - sector impact: debt markets and corporate financing.
- Delay in addressing upcoming maturities would heighten refinancing and liquidity risks for the company - sector impact: corporate treasury and capital markets.