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Announcement:

MOODY'S AFFIRMS ABITIBI-CONSOLIDATED'S Ba3 LONG TERM DEBT RATINGS AND SGL-4 SPEC GRADE LIQUIDITY RATING ON NEWS OF PAN ASIA DIVESTITURE; OUTLOOK REMAINS NEGATIVE

08 Sep 2005
MOODY'S AFFIRMS ABITIBI-CONSOLIDATED'S Ba3 LONG TERM DEBT RATINGS AND SGL-4 SPEC GRADE LIQUIDITY RATING ON NEWS OF PAN ASIA DIVESTITURE; OUTLOOK REMAINS NEGATIVE

Approximately US$3.8 Billion of Debt Securities Affected

Toronto, September 08, 2005 -- Moody's Investors Service ("Moody's") affirmed Abitibi-Consolidated Inc.'s ("Abitibi") Ba3 long term debt ratings and its SGL-4 Speculative-Grade Liquidity ("SGL") rating (indicating weak liquidity), on news that the company has agreed to divest of its 50% interest in PanAsia Paper ("PanAsia"). Since Abitibi's ratings had incorporated the potential benefits of de-levering from the proceeds of potential asset sales, and given the sale price is within the value range anticipated by Moody's, the transaction has no immediate impact on Abitibi's long term debt ratings. However, over the past year Moody's has noted the company's credit protection metrics lagged its rating and that the time frame for significant improvement in credit statistics was advancing. While the PanAsia announcement reflects an effort to de-lever, in the context of the significant improvement in credit statistics required to sustain the Ba3 rating, the impact appears to be relatively modest. Accordingly, the outlook remains negative, and given the macro level factors affecting both the industry and Abitibi, there is significant potential that the rating could be re-evaluated prior to the end of the calendar year.

Ratings affirmed:

Abitibi-Consolidated Inc.

Outlook: negative

Corporate family rating: Ba3

Senior unsecured rating: Ba3

Senior unsecured shelf registration rating: (P)Ba3

Speculative grade liquidity rating: SGL-4

Abitibi-Consolidated Company of Canada

Bkd senior unsecured rating: Ba3

Senior unsecured shelf registration rating: (P)Ba3

Abitibi-Consolidated Finance L.P.

Bkd senior unsecured rating: Ba3

Senior unsecured shelf registration rating: (P) Ba3

Donohue Forest Products Inc.

Bkd senior unsecured rating: Ba3

Prior to the market opening on September 7, Abitibi and its PanAsia joint venture partner, Norske Skogindustrier ASA ("Norske Skog"), announced they had agreed on a transaction that would see Abibiti's 50% interest in PanAsia being sold to Norske Skog for US$600 million plus a contingent payment to be based on 2006 results. Abititi plans to use the proceeds to repay outstanding term debt. When combined with the elimination of some US$300 million of PanAsia's debt that is proportionately consolidated into Abitibi's Balance Sheet, the deal will eliminate some C$1.0 billion of Abitibi's debt (approximately 20%). Depending on how it is measured, foregone cash flow is likely in the 10%-to-15% range. However, while the transaction results in modest de-levering relative to cash flow, i) the company remains over-leveraged relative to its rating, i) the company's rating already incorporated the potential benefits of de-levering from the proceeds of certain saleable assets, and iiii) the PanAsia sale is within the value range expected by Moody's, the transaction has no immediate impact on Abitibi's long term debt ratings or its negative outlook.

Similarly, the transaction has no impact on Abitibi's liquidity arrangements. These are characterized as being weak according to Moody's SGL methodology, and accordingly, have been assigned an SGL-4 Speculative Grade Liquidity Rating. While the transaction may cause the company to temporarily hold a significant cash balance, since closing is not expected until December, and the proceeds are intended to be deployed on term debt reduction, any liquidity impact will be in the future and will be transitory, and therefore does not impact the current SGL rating. Should the company amend its plans so that some of the proceeds are used to bolster liquidity, this will be incorporated into future SGL assessments. In addition, since the associated debt reduction will have a sustainable positive impact on future compliance under the company's Net Funded Debt-to-Capitalization covenant, this too will be incorporated into future liquidity assessments.

The outlook continues to be negative. As noted, while the company has taken significant proactive steps to improve its price realizations and profit margins, ongoing input cost pressure, including those stemming from recent advances taken by the Canadian dollar, may have negated much of the benefit. While other resource based commodities have benefited from off-shore demand that has fueled price increases that have helped to off-set rising input costs, paper and forest products companies have faced rising input costs without the benefit of off-shore demand supporting price increases. With energy, chemicals and fiber costs at elevated levels, margins have not expanded as much as has been observed in other sectors. Various economic uncertainties have also caused concern that North American demand is susceptible to decline, implying that the margin improvement experienced since the sector emerged from a prolonged trough may be at risk. Should off-shore demand cause input costs to remain elevated while output prices decline, significant dislocation will be experienced through-out the sector.

Moody's expectations for a Ba3 rating include average through-the-cycle Retained Cash Flow to Total Adjusted Debt ("RCF/TD") in excess of 10%, with the related (RCF-CapEx)/TD measure in excess of 5%. Given the company's current circumstance, a near term ratings upgrade is unlikely. The most positive near term rating action would involve the outlook migrating to stable from negative. As was noted previously, in the event either or both of 2005 results and expectations for 2006 do not show dramatic improvement over the recent past, a ratings downgrade becomes more likely. A downgrade would also result from significant debt-financed acquisition activity or were liquidity arrangements to deteriorate significantly.

Abitibi-Consolidated Inc., headquartered in Montreal, Quebec, is North America's leader in newsprint and uncoated mechanical paper and also has a significant lumber business.

New York
Mark Gray
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Toronto
William Wolfe
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

No Related Data.
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