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Rating Action:

MOODY'S CHANGES GEORGIA-PACIFIC'S RATINGS OUTLOOK TO POSITIVE AND AFFIRMS RATINGS (BA2 SENIOR IMPLIED, BA3 ISSUER, BA3 SENIOR UNSECURED, SGL-2)

16 Dec 2004
MOODY'S CHANGES GEORGIA-PACIFIC'S RATINGS OUTLOOK TO POSITIVE AND AFFIRMS RATINGS (BA2 SENIOR IMPLIED, BA3 ISSUER, BA3 SENIOR UNSECURED, SGL-2)

Approximately $9 billion of Long Term Debt Instruments Affected

Toronto, December 16, 2004 -- Moody's Investors Service changed the outlook on Georgia-Pacific Corporation's ("GP") ratings to positive from stable, with similar outlook changes initiated for the other entities through which GP and its subsidiaries and predecessor companies have issued debt. At the same time, Moody's affirmed GP's senior implied rating at Ba2, and the senior unsecured and issuer ratings at Ba3. Moody's continued its practice of rating debt that is either issued or guaranteed by Fort James Corporation ("Fort James") at a level equivalent with the Ba2 senior implied rating, with all other debt rated one notch below at Ba3. GP's Speculative Grade Liquidity ("SGL") rating was also affirmed at SGL-2 which indicates good liquidity.

Georgia-Pacific Corporation:

Outlook changed: to positive from stable

Ratings affirmed:

Senior Implied: Ba2

Senior unsecured: Ba3

Issuer rating: Ba3

Speculative Grade Liquidity Rating: SGL-2

Fort James Corporation:

Outlook changed: to positive from stable

Rating affirmed:

Senior Unsecured: Ba2

G-P Canada Finance Company:

Outlook changed: to positive from stable

Rating affirmed:

Backed Senior Unsecured: Ba3

Fort James Operating Company:

Outlook changed: to positive from stable

Rating affirmed:

Backed Senior Unsecured: Ba2

In aggregate, GP's ongoing cash flow generation has improved, but has not yet reached the potential that management foresees. Abstracting from the current influence of what Moody's views as above mid-cycle pricing in the building products and packaging segments, credit metrics continue to be representative of the current Ba2 senior implied rating. While still lagging those of key competitors, it is encouraging to observe returns in the key consumer products segment improving over time. Statistical trends for asbestos payments/liabilities are also encouraging. Another positive factor stems from the fact GP is one of a small number of companies in the Paper & Forest Products sector that has managed to significantly reduce debt over the recent past. Management has also significantly improved the company's liquidity position. In Moody's assessment, these steps show a commitment to significantly enhancing financial stability. Moody's also recently reviewed the company's objectives and strategy in the context of evaluating the potential for abrupt changes in the company's business and capital structure. In particular, it appears a strong and stable financial platform enhances access to the target market in the consumer products segment. Accordingly, there is an underlying business rationale that motivates management to further strengthen the company's business and financial profile, and to maintain and preserve that profile once goals are achieved. With the combination of improved performance and positioning, the outlook has been changed to positive from stable.

The Ba2 senior implied rating is based on residual financial leverage remaining from earlier acquisition activity, GP's improving but still somewhat disadvantaged margin position in its key consumer products segment, uncertain near-term cash flow because of rising input costs and the questionable magnitude and sustainability of the commodity price recovery, the cyclicality/volatility related to commodity price exposure in the building products, packaging, and paper segments, and legacy asbestos liabilities. While the financial magnitude of the asbestos issue appears to have stabilized, until such time as tort reform or some other mechanism confines the liability and the cash drain to more narrow bounds, there will continue to be uncertainty over the true magnitude of the issue, and GP's ratings will continue to be somewhat discounted by the potential of abrupt changes in the magnitude and timing of the related cash payments. In addition to its asbestos exposure, GP also has significant liabilities that are potentially debt like that add to implied leverage. These include pension liabilities and recourse ($265 million) to the company pursuant to a third party financing transaction. The rating also reflects the company's scale in key product lines and the resulting flexibility to reduce costs, the significant market position in the key consumer products segment, the earnings and cash flow stability provided by the relative stability of consumer products' pricing, good liquidity arrangements, good financial reporting and very good access to capital markets. The ratings also reflect the company's actions, which reflect a tangible commitment to reducing indebtedness and improving the credit profile.

The senior implied rating could be upgraded if: i) EBIT-to-Sales and RCF-to-Debt ratios improve to levels that are, in Moody's view, sustainable through the commodity price cycle, at levels well in excess of 10% and 15% respectively; with ii) the company's asbestos liability stabilized or permanently eliminated; iii) its other liabilities reduced from current levels; and iv) good liquidity arrangements being maintained. Alternatively, were Moody's assessment of the above-noted financial measures to deteriorate significantly, or were there to be a significant set-back with asbestos, pension or other contingent funding, the rating and outlook would be susceptible to downgrade. Similarly - it being noted given the company's focus on debt reduction that Moody's does not anticipate GP would consider a material acquisition - a significant debt-financed acquisition would also create circumstances where the rating would be reviewed for downgrade. So too would a material decrease in access to liquidity.

GP's debt has been stratified since the acquisition of Fort James, with Fort James' debt benefiting from a down-stream guarantee provided by GP. As well, Fort James provides an upstream guarantee of certain GP debt. In aggregate, some 40% of outstanding consolidated debt (47% if revolving capacity were fully drawn) is structurally/contractually senior by virtue of either being issued by Fort James and guaranteed by GP ($0.5 billion), or issued by GP and guaranteed by Fort James ($3.1 billion), while 56% is structurally/contractually subordinated as it is issued by GP and does not benefit from a Fort James guarantee ($5.0). In addition, GP has some $3.5 billion of consolidated Other Liabilities, approximately 55% of which reside in the parent company. Of this, the majority relates to accruals for asbestos and other legal and environmental contingencies together with residual recourse back to GP related to the above-noted timber monetization transaction. In that these items are debt-like, they add to the implied leverage at the parent. Accordingly, while 56% of GP's consolidated debt is structurally and contractually subordinated to the guaranteed debt, it is also potentially more impacted by the debt-like Other Liabilities than is the case for the mutually guaranteed debt. Accordingly, the current practice of rating the mutually guaranteed debt at the senior implied level, while rating the un-guaranteed debt one notch below continues to be warranted.

G-P's Speculative Grade Liquidity rating is SGL-2, indicating good liquidity. The company's primary external source of liquidity is its senior unsecured $2.5 billion bank credit agreement that matures in July of 2009 (comprised of the $2.0 billion revolving facility and a $500 million outstanding term loan). G-P also has a committed accounts receivable securitization facility that was recently extended for another year to mature in December of 2005. The facility was also increased to $800 million from $700 million. Near term step-ups/downs to the Minimum Interest Coverage and Maximum Leverage Ratios have been eliminated and the Minimum Net Worth test has been reset to provide additional cushion. G-P is comfortably in compliance with all financial covenants and Moody's estimates that G-P could access the entire unused amount of the credit facility without violating the covenants. Baring unexpected asset write-offs or accruals for asbestos-related expenses for example, GP is not likely to be constrained in accessing its third party liquidity. Availability was recently augmented from the proceeds of three significant asset divestitures, and then subsequently reduced due to a term debt redemption. At the end of the third quarter, GP had $1.6 billion of liquidity comprised of $800 million of availability under the bank line and $314 under the receivables facility.

Georgia-Pacific Corporation, headquartered in Atlanta, Georgia, is a global leader in tissue and other consumer products, and has significant operations in building products, packaging and fine paper.

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

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

No Related Data.
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